Federal Reserve officials: Concerned about the inflation outlook, monetary policy faces "a challenging moment"

Beth Hammack, President of the Cleveland Federal Reserve Bank, expressed concerns about the inflation outlook, stating that monetary policy is at a "challenging moment" and she is cautious about further interest rate cuts. Her remarks add a hawkish voice to the current debate regarding the Federal Reserve's policy path.

On Monday, Hammack stated in an interview that she expects inflation to remain above the Federal Reserve's 2% target for the next one to two years, possibly not returning to that level until late 2027 or early 2028. She specifically noted her worries about inflation pressures in the service sector and believes there are pressures on overall, core, and service sector inflation.

Despite the Federal Reserve having implemented its first interest rate cut since last December in September, Hammack believes the current monetary policy stance is only "moderately restrictive." She indicated that she would only hope to shift to an accommodative stance if there is a "more substantial weakening" in the economic outlook, which she does not currently see.

Hammack's comments come as investors have lowered their expectations for rapid interest rate cuts by the Federal Reserve due to a series of stronger-than-expected economic data. Investors generally believe there is about a 90% chance the Federal Reserve will cut rates by another 25 basis points at the meeting on October 28-29.

Inflation May Remain Above Target for Years

In Hammack's view, the stickiness of inflation is her core concern. She believes the Federal Reserve has failed to achieve its 2% inflation target for four and a half years, and this situation may persist for some time. She stated:

"I am still concerned about the inflation environment we are in."

Hammack's worries cover multiple aspects of inflation. She remarked:

"I continue to see pressure on inflation, whether it is overall inflation, core inflation, and especially the service sector inflation that I am concerned about."

Additionally, Hammack is cautious about the impact of tariffs. While some Federal Reserve officials acknowledge that the impact of tariffs on prices has been limited so far, Hammack suggested she disagrees with colleagues who view this effect as a one-time event. She reiterated the need to "maintain a restrictive policy stance."

Policy Stance "Moderately Restrictive"

Regarding the current policy level, Hammack provided a clear assessment. She believes the target range for the federal funds rate of 4.00%-4.25% is "moderately restrictive" and revealed that her estimate of the neutral rate is among the "higher ones" in the committee.

"For me, we are just a short distance from reaching the neutral rate," she stated. She has set a high bar for shifting to an accommodative policy, which requires seeing a "more substantial weakening" in the economy, something she does not currently observe.

Her comments were made against the backdrop of significant pressure on the Federal Reserve from the Trump administration to cut rates. Nevertheless, Hammack's stance indicates that some decision-makers still view inflation data as a key policy guide.

Recent economic data seems to support Hammack's cautious stance. Data released last week showed that U.S. personal spending in August exceeded expectations, while underlying inflation pressures remained stable The U.S. Department of Commerce reported that the Personal Consumption Expenditures (PCE) price index rose 0.3% month-on-month in August, with a year-on-year inflation rate of 2.7%. Excluding food and energy, the core PCE price index, which is of greater concern to the Federal Reserve, has an annual rate of 2.9%.

However, the strong economic data has not completely dispelled market expectations for interest rate cuts. Investors in federal funds futures contracts believe there is about a 90% chance that the Federal Reserve will cut rates by another 25 basis points at its next meeting on October 28-29.

Increased External Uncertainty Poses Policy Challenges

In addition to inflation, Hammack also discussed other challenges facing the Federal Reserve. When asked about the independence of the Federal Reserve, she stated that discussions surrounding the central bank are "fairly normal" to some extent, but also acknowledged that the current situation has unprecedented factors, such as "a Federal Reserve governor who is on leave from a government position, and the president attempting to remove a governor."

Regarding the imminent risk of a U.S. government shutdown this week, Hammack warned that it could weigh on the economy. She stated:

"I expect that as long as the shutdown continues, it will have some degree of drag on GDP." She added that the Federal Reserve needs to observe its long-term impact and how the situation will develop. These external uncertainties collectively constitute what she describes as a "challenging moment" for monetary policy