Fed’s Hammack Says Restrictive Rates Needed to Cool Inflation

Federal Reserve Bank of Cleveland President Beth Hammack said interest rates need to be restrictive to bring inflation to the central bank’s target, and more frequent moves can reduce the risk that policy falls behind.

“I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner,” Hammack said Thursday in remarks prepared for an event in Zurich, adding she prefers making “more frequent, smaller adjustments when possible.”

“This strategy would also reduce the risk of having policy fall behind where it needs to be and an inflationary mindset take hold,” she added.

Hammack was one of two Fed officials who dissented last week when policymakers voted to hold their benchmark rate steady on the heels of strong inflation data. A handful of other officials speaking since the meeting have advocated for a gradual pace of tightening to limit the effects on financial markets and the economy.

Investors see it likely the Fed will raise interest rates in December and again in March, according to pricing in futures contracts.

The Cleveland Fed chief also spoke about the dominance of the US dollar, which she said “plays a central role in foreign-exchange transactions across the globe.” The dollar’s reserve currency status relies on a strong rule of law in the US, its availability in strong and liquid markets and on the independence of the central bank, she said.

Inflationary Mindset

Hammack has previously warned that repeated supply shocks increase the risk of businesses and consumers adopting an inflationary mindset, making it more difficult for the central bank to achieve its 2% target.

On Thursday, she said inflation has been above target for nearly six years and reiterated that price pressures appear to be broad based, influenced by both supply and demand factors.

Hammack spoke two days after Democrats made sweeping gains in the US midterm elections, winning control of both houses of Congress in a shift that could shield the Fed from President Donald Trump’s efforts to exert influence over interest rate policy.

Read More: Trump’s Trouncing Gives Warsh More Room for Maneuver on Rates

Hammack on Thursday touted the importance of the central bank’s ability to set interest rates without political interference.

“Through its actions, the Fed has earned credibility as an institution that conducts monetary policy based on evidence and economic data rather than on short-term political pressures,” Hammack said. “That credibility helps us achieve our objectives, including low and stable inflation, while supporting the status of the dollar.”