Cleveland Federal Reserve President Beth Hammack said Monday that a tightening of monetary policy may be necessary to bring down inflation and that the central bank should make rapid, gradual adjustments.
“When possible, I generally think it’s better to make small adjustments, and to do so relatively quickly, rather than wait and risk needing a larger course correction,” Hammack, a voting member of the Fed’s policymaking committee, said in prepared remarks at the annual gathering of the National Association of Business Economics.
“Taking into account all the factors that enter into my reaction function, a restrictive monetary policy is appropriate to ensure a rapid return to 2 percent inflation,” Hammack added.
Hammack’s comments signal that further interest rate hikes could be on the horizon. Fed officials indicated in September meeting minutes that they might vote to raise rates again, but gave no clear indication of when such a decision would come.
The Fed voted last month to raise interest rates for the first time in three years.
Traders have priced in a more than 78% chance that the central bank will keep rates unchanged at its policy meeting scheduled for later this month, according to the CME’s FedWatch tool. But they estimate there is almost an 88% chance that a hike will be made at the Fed’s final meeting of the year in December.
Persistent inflation poses problems for consumers, businesses and monetary policymakers, Hammack said. The Cleveland Fed chief said that given the “magnitude” of current inflationary pressures, she expects it will take “some time” to return annual price growth to the central bank’s 2% target.
The personal consumption expenditure price index stood at 3.4% year-on-year in August. The so-called core index, which excludes volatile food and energy costs and is favored by the Fed, registered 3% from a year earlier.
“Long-term inflation expectations have remained remarkably well anchored, even though actual inflation has been above target for more than five years,” Hammack said. “But I don’t take that for granted.”
“With each passing month, persistently high inflation increases the risk that an inflationary mentality will take root in the economy,” she said.
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