By Michael S. Derby
NEW YORK, March 6 (Reuters) – Federal Reserve Bank of Cleveland President Beth Hammack said on Friday that while she expects inflation pressures to moderate, if they are not easing later this year the U.S. central bank may have to weigh tighter monetary policy to ensure price pressures retreat to 2%.
“My expectation has been that inflation would start making progress towards our 2% target. I don’t think we’ll get there by the end of this year by any stretch, but I think we’ll make some decent progress,” Hammack said in an interview with Reuters.
Given the current outlook, “rates should be on hold for …quite some time,” Hammack said. But she added that if price pressures do not retreat, the Fed might need to take renewed action to ensure that they will.
“If inflation is not making progress towards our goal in the latter half of this year, as I expect that it should, that might be a reason why we might need to be more restrictive from policy perspective,” Hammack said.
The bank president said it is possible but not assured that inflation will ease to the 2% target by 2027, but it does not need to be at the goal to support easier policy. Instead, the Fed can cut rates if there is strong confidence that inflation is on track to hit the goal.
Hammack said it was unclear so far what surging oil prices tied to President Donald Trump’s war on Iran mean for future inflation.
It is “too early to know” how all this will play out, Hammack said. When it comes to the oil shock, “I try to look at what’s the magnitude and what’s the persistence? So, is this something that lasts for a week? Does it last for two months? Depending on what you know, what that time frame is, (that) will determine some more of the underlying economic impact,” she said.
The official said it is possible that an extended shock will both drive up inflation and depress factors like growth and hiring, and the Fed will have to evaluate those circumstances before deciding on a policy response.
FED FACES CONFLICTING PRESSURES
Hammack was interviewed on the same day that the government released economic data that showed that the U.S. economy lost 92,000 jobs in February amid a small rise in the unemployment rate to 4.4%. The negative turn on hiring bolstered fears of labor market vulnerability and came as Trump’s war has caused energy prices to surge amid substantial disruptions in global supplies.
Those two factors potentially put the Fed in a bind. Large-scale gasoline price increases risk pushing up already-high levels of inflation that are in turn already elevated by Trump’s campaign of large-scale tax increases on imports. They also risk unmooring the public’s expectation of future inflation and point to the potential need for the Fed to keep interest rates on hold for longer, or even to weigh a rate hike.
But on the other side, a sputtering job market could agitate for a rate cut. The Fed lowered its interest rate target by three-quarters of a percentage point to between 3.5% and 3.75% last year to help support the job market, even with inflation overshooting the 2% target.
The Fed next meets March 17-18 and is widely expected to hold interest rates steady. Hammack is a voting member of the rate-setting Federal Open Market Committee this year.
Hammack said in the interview that the jobs data shows signs of stabilizing and that she most closely tracks the unemployment rate right now amid uncertainty surrounding the factors now at play with the payroll number.
Hammack said she did not see any major systemic issues in financial markets but added that private credit troubles were on her radar and that developments there could bring some pain to investors.
She also defended the current banking regulatory system used by the Fed as the institution is weighing changes that could lead to lighter oversight of the financial system.
“I believe that the system has been made safer by a number of the regulations that were put in place” after the great financial crisis, Hammack said. She noted those rules aided the successful navigation of the COVID-19 pandemic by banks, which were “able to be a source of strength and a source of lending into the real economy” during those troubles.
“I think it’s important that we maintain that level of support,” Hammack said, adding it was still possible that certain areas might be tweaked or changed.
(Reporting by Michael S. Derby in New York; Editing by Matthew Lewis)
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