Fed's Hammack sees multiple hikes needed as one 25bp move insufficient

Cleveland Fed President Beth Hammack said a single 25-basis-point rate increase would do little to restrain the economy, arguing multiple hikes may be needed to hit the Fed's 2 percent target.

"One 25 basis point move probably doesn't do a whole lot for the economy," Hammack, who dissented at the Fed's July meeting in favor of a quarter-point increase, said in a Yahoo Finance interview. "It's probably some number of movements," she added, declining to prejudge the total or the eventual peak for rates.

The comments reinforced hawkish expectations, with CME FedWatch data showing the probability of a September rate hike at 51.7 percent. Treasury yields rose across the curve Monday, with the 2-year up 4 basis points to 4.239 percent and the 10-year up 5.2 basis points to 4.701 percent, as higher crude prices on Middle East tensions fed inflation concerns. The S&P 500 slipped 0.05 percent to 7,753 while gold tested $4,400 an ounce.

The fed funds rate sits at 3.50-3.75 percent, unchanged since the July FOMC meeting where three voters dissented in favor of a hike — the first time since 2016 that three officials dissented in a single decision. Wednesday's July CPI report, expected to show core inflation easing to 2.5 percent from 2.6 percent, will be the next test of whether Hammack's case for multiple hikes holds.

Hammack argued that current policy is not meaningfully restrictive. She said business contacts have not reported restraint on investment or growth because of borrowing costs, suggesting the time to act is now. "So to me that says that now is the time to act," she said. She compared gradual tightening to easing toward a stop sign rather than braking abruptly, warning that delaying action would prolong the period during which inflation remains above target and make eventual disinflation more costly.

She also pushed back against the idea that higher market yields can substitute for Fed action. "Markets are a complement for the Fed. They're not a substitute," she said, adding that policymakers must "stand behind our words with our actions when appropriate."

Labor Market Resilience Doesn't Sway Her Inflation Focus

Friday's July jobs report showed a surprise loss of 23,000 jobs, yet Hammack said she is "still not seeing a problem" in the labor market. She noted that payrolls have averaged monthly gains of 20,000 to 25,000 over the past year and that the unemployment rate of 4.1 percent is close to her estimate of full employment. "From where I sit, I just don't see it coming back on its own," she said of inflation.

The Fed's preferred inflation gauge, the core Personal Consumption Expenditures index, stood at 3.3 percent in June. The Consumer Price Index was 2.6 percent on a core basis for June, with economists expecting a decline to 2.5 percent for July.

Divergence Widens Within the FOMC

Hammack's hawkish stance contrasts with New York Fed President John Williams, who said last week that current policy is "well-positioned" and expects inflation to decline in the second half of the year. The split has pushed market pricing toward a coin toss for September, with the October meeting showing a 50.7 percent probability of a cumulative 25-basis-point hike and a 14.9 percent probability of a cumulative 50-basis-point move.

The last time the Fed faced this level of internal dissent was in 2016, when three officials dissented in a single decision. That episode preceded a rate hike within months, though the current environment differs with inflation running well above target for more than five consecutive years.

The September FOMC meeting will be the next decision point, with Wednesday's CPI report serving as the key data point for shifting expectations. If core inflation comes in hotter than the 2.5 percent consensus, Hammack's case for multiple hikes gains traction. A downside surprise would challenge her assessment and could push September pricing back toward a hold.

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