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A Federal Reserve policymaker is warning that it could make sense to raise interest rates if inflation remains elevated above the Fed’s 2% target amid uncertainty over the duration of the oil and gas price shock.
Federal Reserve Bank of Cleveland President Beth Hammack said in an interview with The Associated Press that she sees the central bank leaving the benchmark federal funds rate at its current level of 3.5% to 3.75% “for quite some time.”
Hammack also cautioned that while the Fed’s next rate move could be a cut due to labor market concerns, there is a possibility that it could be to hike rates to curb stubborn inflation.
“I can foresee scenarios where we would need to reduce rates… if the labor market deteriorates significantly,” Hammack told the AP. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”
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Hammack noted that the Cleveland Fed’s estimates of inflation show that it could increase to 3.5% in April. That would amount to the highest inflation reading since 2024 and a significant increase from the consumer price index’s most recent reading of 2.4% in February.
“Inflation has been running above our target for more than five years now,” Hammack said in the interview, adding that a further increase would mean inflation is “moving in the wrong direction, away from our 2% objective.”
Hammack said that the surge in gas prices caused by the Iran war is “the No. 1 thing” she hears about when talking to people within her district, adding that she and other policymakers “know that causes a lot of pain personally, as it eats up a bigger and bigger share of people’s paychecks. So it’s important for us to stay focused on it.”
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The Cleveland Fed president – who is also a voting member of the central bank’s Federal Open Market Committee (FOMC) that makes interest rate decisions – said that the Iran war’s economic impact will depend on how long it lasts.
If higher energy costs prompt consumers to pull back on their spending, it could slow economic growth and cause businesses to conduct layoffs, prompting the Fed to cut interest rates to support the labor market.
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Fed policymakers will get two sets of fresh inflation data this week, starting with the Commerce Department’s personal consumption expenditures (PCE) index for February which will be released on Thursday. The PCE index is the Fed’s preferred inflation gauge and the February edition of the report was delayed by the government shutdown.
Additionally, the Labor Department will release the consumer price index (CPI) inflation report for March on Friday.
The FOMC will hold its next monetary policy meeting on April 28–29, when it will announce whether the benchmark interest rate will be held steady, increased or reduced.
Policymakers left interest rates unchanged at their most recent meeting in March, after doing the same at the previous FOMC meeting in January.
