Following three consecutive interest rate cuts by the Federal Reserve, Loretta Mester, President of the Cleveland Fed, who will gain voting rights next year, has taken a clear stance: maintaining strong pressure on inflation is essential. She warned that current policies may still be stimulating the economy and that official data could be underestimating price pressures.
Beth Hammack, president of the Federal Reserve Bank of Cleveland, stated that after three consecutive rate cuts by the Federal Reserve, she sees no need to adjust interest rates in the coming months.
Hammack opposed recent rate cuts due to her concerns about persistently high inflation, which outweighed worries about potential vulnerabilities in the labor market—concerns that prompted officials to cut rates by a cumulative 0.75 percentage points over the past few months. Although Hammack is not a voting member of the Federal Open Market Committee (FOMC) this year, she will gain voting rights next year.
"My baseline expectation is that we can keep interest rates at the current level for a period of time until we obtain clearer evidence showing that inflation is receding to target levels or that the job market is showing more substantial weakness," she said during an interview last Thursday with The Wall Street Journal’s "Take On the Week" podcast.
Hammack noted that the November inflation data released last week appeared favorable, but it likely understated the price increases over the past 12 months due to distortions in data collection caused by the government shutdown in October and the first half of November.
She stated that while the Bureau of Labor Statistics reported a 2.7% year-over-year increase in the Consumer Price Index (CPI) for November, adjustments accounting for measurement difficulties brought the estimate closer to the widely expected range of 2.9% to 3.0% by analysts.
"While it's good to regain official data from the Bureau of Labor Statistics, I hold some reservations about it," she said.
At the core of Hammack’s concerns about rate cuts is her view that the so-called 'neutral interest rate'—a level that neither stimulates nor slows economic growth—is higher than commonly believed, and the economy is well-positioned for robust growth next year. The neutral rate cannot be directly observed but can be inferred based on how the economy operates. This suggests that the net effect of the Fed’s policy may still be stimulative.
Hammack hinted that the Federal Reserve does not need to adjust its benchmark interest rate, currently in the range of 3.5% to 3.75%, at least until the spring of next year. By then, she said, the Fed would be better able to assess whether recent goods price inflation is subsiding as the impact of tariffs becomes more fully absorbed in supply chains.
The former Goldman Sachs executive noted that corporate leaders had informed her that higher input costs, including those driven by tariffs, might prompt them to raise prices more significantly in the first quarter. Given that inflation has "remained close to 3% for most of the past 18 months," this situation is concerning, she said.
Editor/KOKO