Fed's Hammack says 3.5% inflation outweighs jobs as top concern

Cleveland Fed President Beth Hammack said the central bank's dual mandate faces no inherent conflict, but inflation remains stubbornly high and a greater worry than the labor market.

Cleveland Fed President Beth Hammack said inflation running at 3.5% is a greater concern than the labor market, pushing back against the notion that the central bank must choose between its dual mandates.

"There is no conflict between the Fed's dual mandate," Hammack said, referring to the central bank's twin goals of price stability and maximum employment. "Inflation is stubbornly high and widespread. It is the bigger worry."

The comments come as the Fed's preferred inflation gauge remains well above the 2% target, with the consumer price index rising 3.5% in June from a year earlier. Core inflation stood at 2.6%. The fed funds rate has been held at 5.25% to 5.5% since July 2023, and CME FedWatch data shows traders pricing a 17% probability of a rate hike at the July meeting.

Hammack's remarks align with a growing hawkish faction at the Fed. Governor Christopher Waller said Monday that a rate hike "should be on the table" if inflation data comes in hot, while Minneapolis Fed President Neel Kashkari has penciled in one rate increase for 2026. The next Federal Open Market Committee meeting is July 29-30.

Hammack, who votes on policy this year as a rotating member of the Federal Open Market Committee, said she has started hearing from businesses demanding action to curb inflation. She described US economic growth as good and consumer spending as stable, suggesting the economy can withstand tighter policy without tipping into recession.

The last time a Fed official used language this direct about inflation trumping employment was in late 2023, when Waller warned that "tightening financial conditions" warranted caution. The S&P 500 fell 2.5% in the two weeks following those remarks as markets repriced rate expectations.

Rate Path Hinges on Inflation Data

The Fed's next move depends heavily on incoming inflation prints. While June's headline CPI showed a 0.4% monthly decline — the first drop in six years — that was driven almost entirely by a 5.7% fall in energy prices during a fragile ceasefire with Iran. With the US and Iran now back to exchanging military attacks, Brent crude has surged 18% this month to about $86 a barrel, threatening to reverse that progress.

Waller, who previously backed rate cuts earlier this year, has shifted sharply hawkish. "A rate hike should be on the table if this week's inflation data come in hot," he said in a speech at the New York Association for Business Economics. He also warned that "sternly staring at inflation until it melts before our withering gaze is not an option."

The 10-year US Treasury yield has climbed to 4.60% as the conflict in the Middle East persists, reflecting the market's repricing of rate expectations. OIS markets now assign a 17% probability of a July hike, down from 42% before the June CPI report but still elevated relative to the start of the year when traders were pricing multiple cuts.

Dual Mandate Debate Resurfaces

Hammack's assertion that the dual mandate presents no conflict runs counter to a long-running debate among economists about whether the Fed must sometimes prioritize one goal over the other. Former Fed Chair Jerome Powell often described the two objectives as complementary in normal times but acknowledged trade-offs during periods of supply-shock inflation, such as the post-pandemic surge.

The Cleveland Fed chief's view echoes that of Chair Kevin Warsh, who said at his June press conference: "I don't believe that we have a cruel choice. What I believe is if we do our job, we can make strong growth, low prices and strong employment mutually compatible." Warsh has made overhauling Fed communications a priority, creating five task forces to examine monetary policy frameworks.

For now, the labor market remains near full employment, according to Hammack, giving policymakers room to keep rates elevated without triggering a sharp rise in unemployment. The challenge, she indicated, is that inflation remains too widespread to declare victory.

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