Hammack Sees Several Rate Hikes as Inflation Stays Above 2%

Cleveland Fed President Beth Hammack said the Federal Reserve will likely need to raise interest rates "several times" to curb inflation, arguing the current 3.5-3.75 percent range is not meaningfully restraining the economy.

"I would say in general, one 25 basis point move probably doesn't do a whole lot for the economy," Hammack told Yahoo Finance in an interview. "So it's probably some number of [movements]. But I don't want to prejudge what that number is going to be."

Hammack dissented at the Fed's July policy meeting when the Federal Open Market Committee voted 9-3 to hold the benchmark rate steady for a fifth consecutive meeting. She was joined by Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan in favoring a quarter-point hike. Traders now price a 76 percent chance of a September rate increase, up from 59 percent a month ago, according to CME data. Brent crude futures traded near $87 a barrel Monday after Iran signaled a deal to reopen the Strait of Hormuz is "very close." Stocks slipped as investors weighed the hawkish signals, with the Dow Jones Industrial Average falling 0.3 percent.

The hawkish pushback complicates the path for Fed Chair Kevin Warsh, who has declared "no tolerance" for elevated inflation while facing pressure from President Donald Trump to cut rates. With inflation stuck above the 2 percent target for more than five years and the Iran war driving energy prices higher, Wednesday's CPI reading could determine whether the Fed moves at its September meeting.

Policy Rate Not Restrictive Enough

Hammack said she does not believe the current range is "meaningfully restricting" the economy. "When I'm talking to businesses, I'm not hearing that they're sensing any restraint from investments in growth based on where interest rates are," she said. "So to me that says that now is the time to act."

The Fed has held rates steady since the last of 11 hikes in 2022 and 2023 took the benchmark from near zero to its current range. Inflation peaked at just over 9 percent in mid-2022 and has since fallen, but progress has stalled above the central bank's 2 percent target. Core inflation — which excludes volatile food and energy prices — cooled in June, partly because apartment rents are no longer rising as fast. But Hammack said she has not seen inflation declining on its own, a view echoed by Fed Governor Christopher Waller, who said this month: "Sternly staring at inflation until it melts before our withering gaze is not an option."

Energy Shock Complicates the Calculus

The Iran war has added a new layer of complexity. After U.S. and Israeli attacks on Feb. 28, Iran shut down the Strait of Hormuz — through which a fifth of the world's oil and natural gas pass — causing the greatest disruption in oil supplies in history. Oil briefly blasted past $100 a barrel last week before settling near $87 on hopes of de-escalation. Iran's foreign minister said Saturday that a deal to reopen the strait is "very close," but Tehran also renewed demands for compensation, suggesting any respite for energy supplies may be limited.

The last time the Fed confronted a similar energy-driven inflation shock was in 2022, when it delivered four consecutive 75-basis-point hikes before slowing the pace. The current situation differs in that the labor market is cooling — July payrolls came in weaker than expected — even as price pressures persist. The July jobs report showed the economy shed jobs even as the unemployment rate ticked down, a mixed signal that has given the majority of Fed officials cover to hold rates steady while they await more data. That tension has split the committee: three officials want to hike now, while the majority prefers to wait.

Equity markets have taken notice. The S&P 500 slipped 0.1 percent Monday while the tech-heavy Nasdaq Composite fell 0.4 percent, with Nvidia dropping 3 percent on reports of a $500 billion AI infrastructure financing package. Gold posted its best week since February, gaining nearly 7 percent, as investors sought haven assets. The dollar has strengthened against major currencies as rate differentials favor the U.S.

If the Fed does hike in September, it would mark the first increase since July 2023, when the benchmark was at its prior peak. The decision hinges on whether Wednesday's CPI print confirms that inflation is broadening, as Hammack suggested, or proves to be a one-off as some Bank of America strategists have argued. "A report in line with our expectations would strengthen the case for the Fed hiking in September," BofA's Stephen Juneau wrote Friday. The stakes are high: a rate hike would ripple through mortgage rates, corporate borrowing costs, and equity valuations, potentially slowing the AI-driven investment boom that has powered the S&P 500 to record levels.

This article is for informational purposes only and does not constitute investment advice.