Hammack’s remarks reinforce the hawkish tilt within the Fed and keep the possibility of a back-to-back hike alive, even though markets currently expect a hold in October. Her explicit focus on AI-driven capex and wealth effects puts high-flying tech equities in the crosshairs, since tighter policy aimed at curbing investment and asset-fuelled spending works partly through valuations. The comments should lend support to the dollar and front-end Treasury yields, while also weighing on gold, which has tended to fall as rate hike expectations build. Traders will watch whether other voters echo her view that the inflation fight now targets demand directly rather than the labour market.
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Hammack wants to take some heat out of a booming economy without burning the labour market, and she is open about which part of demand she would prefer to cool first.
Summary:
Cleveland Federal Reserve President Beth Hammack said on Monday she believes US interest rates need to rise further to restrain demand. She also said she hopes the Fed can bring inflation down without damaging a labour market that remains close to full employment.
In an interview with Reuters, Hammack said demand is being driven both by a rapid pace of corporate investment and by market-driven wealth gains that are supporting consumer spending, factors she sees as keeping inflation lodged in a range of 2.5% to 3.0%. In her view, restrictive monetary policy could cool those forces enough for inflation to fall without unemployment rising beyond the current 4.2%. She said she is not trying to stop growth, only to slow it to a pace that eases pricing pressure. A pullback in either business investment or consumption would help, she added, and restraint on the capital spending side might mean less of the burden falls on consumers.
Hammack said she would go into the Fed’s October 27-28 meeting with an open mind on whether another hike is warranted after September’s increase. She feels more restriction is needed, she said, but considers the timing an open question. Hammack is a voter on rate policy this year and dissented in July in favour of a hike, while investors currently expect the Fed to hold in October. Her remarks are among the most explicit from a Fed official about using restrictive policy to cool demand directly.
With inflation high and the labour market stable, Hammack said the Fed is being challenged on only one side of its mandate. She wants to address inflation deliberately so that employment is not weakened unnecessarily. In her assessment, consumer spending is being held up largely by higher-income households and the wealth effect.
Hammack said business contacts sound more like they are describing a booming economy than preparing to retrench. She is concerned that an inflationary psychology may already be taking root among firms competing for resources, as relentless investment by AI hyperscalers leaves cost a secondary concern. Executives, she said, are planning for inflation to stay high and expect to raise prices faster than their input costs. In her view, the pressure that began with data centres is now spreading more broadly.
Hammack described monetary policy as a single blunt instrument that she intends to use judiciously, in the right amount and at the right speed, while maintaining that more restraint is needed. Her comments leave the October decision finely balanced between market expectations of a pause and a hawkish core of policymakers who see a case for tightening further.
This article was written by Eamonn Sheridan at investinglive.com.
Source: Investing Live - Central Bank
