A small but growing faction of Federal Reserve policymakers is openly calling for higher interest rates to combat persistently elevated inflation, setting the stage for a contentious debate at the central bank's July 28-29 policy meeting, even as financial markets continue to expect rates to remain unchanged. Cleveland Fed President Beth Hammack added her voice to the hawkish chorus on Friday, the last day policymakers were permitted to speak publicly before the upcoming meeting. In a LinkedIn post, Hammack cited direct feedback from the business community as a driving force behind her concern.
"For the first time in my tenure, I'm hearing from businesses who say they think we need to take action to curb inflation, and from consumers who can't make ends meet about a growing sense of despair," she wrote. Hammack, who joined the Fed in 2024 and cast a dissenting vote in April alongside two colleagues protesting what they considered overly accommodative policy, assessed that underlying inflation as measured by the core personal consumption expenditures price index probably rose 3.3% in June. "Persistently high inflation is the bigger concern," she added, noting the labor market was near her estimate of maximum employment.
Her comments followed similar hawkish signals from other Fed officials earlier in the week. Dallas Fed President Lorie Logan, who also dissented in April, told an audience in Houston on Thursday that the situation calls for "modestly higher interest rates." In a notable departure from his typically cautious tone, Fed Vice Chair Philip Jefferson told a Stanford University audience that if inflation "does not start to cool down soon, I believe that it could be appropriate to reconsider our current policy stance." All three officials expressed concern about higher fuel prices stemming from the Middle East conflict and rising price pressures driven by the rapid buildout of artificial intelligence-related data centers. Not all Fed voices are aligned on the need for tighter policy, however.
New York Fed President John Williams struck a more dovish note, arguing that inflation, though "unquestionably high," will soon ease. Williams cited several factors supporting his view, including the absence of significant wage-growth pressure in the labor market and his expectation that shelter inflation will continue to moderate. Fed Chair Kevin Warsh remained deliberately silent on the policy outlook, telling lawmakers this week that hinting at how incoming data might influence his stance would be unwarranted and potentially harmful.
"My colleagues know I'm not big for forward guidance," Warsh said. The debate is unfolding against a backdrop of still-elevated but slightly cooling consumer price inflation. The Labor Department reported this week that consumer prices rose 3.5% year-over-year in June, down from a surge of 4.2% in May, though still well above the Fed's 2% target.
Fed Governor Christopher Waller said Monday the moderation offered him little reassurance, stating he would need to see "several months" of cooler readings before concluding that inflation was on a sustainable path back to the central bank's goal. Financial markets are currently pricing in no change to the Fed's policy rate, which currently sits in the 3.50%-3.75% range, at the July meeting. However, markets are betting the central bank will deliver at least one rate hike at one of its three remaining meetings before the end of the year, according to Reuters.
The divergence of views among policymakers underscores the difficulty of the Fed's task: balancing the risk of doing too little to contain inflation against the risk of tightening into a still-complex economic environment. The July 28-29 meeting will be the first formal setting in which the full spectrum of these competing views is put to a vote.
Source: reuters.com