Higher rates could be needed to avoid 'inflationary mindset' taking hold, says Fed's Hammack

Cleveland Federal Reserve President Beth Hammack said that tighter policy may be needed to ensure inflation returns to the Fed’s 2% goal, framing her argument around the risk that inflation becomes embedded in economic behavior. She suggested that, when feasible, the Fed should make smaller adjustments relatively quickly rather than waiting and then needing a larger course correction.

Hammack also linked the case for restriction to the “breadth” of current inflationary pressures and the time it may take to bring annual price growth down. She said inflation has been above target for more than five years, even as long-run inflation expectations remain “remarkably well anchored”, while adding that this anchoring should not be taken for granted.

The remarks come after Fed officials in September meeting minutes indicated they could vote to raise rates again, though without specifying timing. The article notes traders currently assign a high probability of no change at the policy meeting later this month, while still pricing a meaningful chance of a hike at the Fed’s December meeting.

For FX traders, the key watch is how this guidance shifts market expectations for the timing and magnitude of further US tightening, and whether it reinforces the idea that “sticky” inflation will keep the policy stance restrictive for longer.