(Bloomberg) -- Federal Reserve Bank of Cleveland President Beth Hammack, in explaining her dissenting vote at this week’s central bank meeting, said interest rates should be held steady until there’s more progress in cooling inflation.
Hammack said she estimates that interest rates are close to a neutral level where they would neither slow nor stimulate the economy, and suggested rates should remain high enough to modestly restrict economic activity “for some time.”
“Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2% objective,” Hammack wrote in a statement released Friday.
Hammack, who joined the Fed in August and has voted a total of three times, said while the economy is “in a good position,” there’s more work to do on easing price pressures. The Federal Open Market Committee cut rates for a third consecutive time at its Dec. 17-18 gathering, lowered their benchmark rate to a range of 4.25% to 4.5%.
Officials’ estimates for the neutral rate of interest have been rising over the past year. The median of the Fed’s 19 policymakers rose to 3% from 2.9% in September, but six members think it’s at 3.5% or higher.
The Cleveland Fed chief also emphasized her worries about inflation expectations, which play a role in keeping price pressures under control.
“A stall in inflation above 2% for too long would risk de-anchoring inflation expectations, making it harder to return inflation to our objective,” Hammack wrote.
While she voted against the rate cut this week, Hammack’s views are not far from much of the rest of the committee following the meeting. Even as policymakers lowered rates, they signaled that a much slower pace of reductions is likely next year.
In a press conference after Wednesday’s decision, Chair Jerome Powell said further rate reductions would only come following cooler inflation readings.
Inflation as measured by the Fed’s preferred gauge, the personal consumption expenditures index, rose at a 2.4% pace in November from a year ago, data published Friday showed. It’s up for a second consecutive month and an underlying measure of prices that strips out more volatile categories increased by 2.8%, little changed from October.
Speaking earlier Friday, San Francisco Fed President Mary Daly said she is “very comfortable” with policymakers’ median projection of two cuts next year.
“My projection is that it will take many fewer rate cuts next year than we thought, but I’ll watch the economy and see if that works out,” Daly said Friday in an interview on Bloomberg Television.
In a separate interview, Chicago Fed President Austan Goolsbee said he’s adjusted his 2025 outlook for rates a little higher but added he still expects borrowing costs to fall a “fair bit more” over the next 12 to 18 months.
“I believe we’re on path to 2%,” he said Friday, referring to inflation in an interview on CNBC. “And over the next 12-18 months rates can still go down a fair amount.”
New York Fed President John Williams said he had started factoring President-elect Donald Trump’s proposed policies into his economic projections.
“In my own personal forecast, I have incorporated some thinking about where fiscal policy may be, immigration and other policies, because those are important drivers to thinking about the economic outlook,” Williams said in an appearance Friday on CNBC. “But I would just emphasize that there is a lot of uncertainty.”
Freshman Dissent
Hammack joined the Fed after a three-decade career at Goldman Sachs Group Inc. that spanned finance, capital markets and risk management. Her dissent was the first by a regional bank president since 2022 and followed one by Governor Michelle Bowman in September.
A dissent by a freshman Fed president isn’t typical in recent years and caught the attention of one former reserve bank head.
“You understand the challenge: The chairman has to get to a consensus decision,” said J. Alfred Broaddus Jr., Richmond Fed president from 1993 to 2004. “You want to support that. But there comes a time when you have to say ‘no, I don’t agree with this.’”
“It takes a willingness to buck the majority,” Broaddus said. “I admire her.”
He said independence and diversity among reserve bank presidents enhances the quality of monetary policy over time. Broaddus dissented in his first year as a voting member of the FOMC in 1994.
Hammack has characterized her emphasis on restoring price stability as working for the interests of her district, where she says she sees lower-income people struggling with high prices.
“That bottom part of the income spectrum is really struggling,” Hammack said in response to a question after her first major speech earlier this month.
Some members of Hammack’s research team have suggested it will be more difficult than many expect to bring inflation all the way down to 2%.
“The intrinsic dynamics of inflation are very persistent,” Cleveland Fed senior research economist Randal Verbrugge wrote in an economic note in May. “Inflation could take several years to return to its target.”
Inflation Focus
Fed officials themselves are starting to predict more persistence in inflation pressures. The median estimates for both core and headline inflation each rose in the Fed’s December forecasts. That’s a troubling admission that, even with the right monetary policy setting, inflation will take longer to stifle.
While Hammack made her own decision, the Cleveland Fed has long had an inflation research focus, and several former presidents have been price stability hawks.
Hammack’s predecessor, Loretta Mester, was an advocate of moving rates up in large steps to get ahead of inflation in 2022, and Lee Hoskins, who was president from 1987 to 1991, once called on Congress to make price stability the “overriding priority” of the Fed. Former President Sandra Pianalto once noted that Dante put “falsifiers of money” in “one of the deepest parts of hell.”
“Thankfully, we are not so severe with those who create inflation today,” Pianalto said. “But we do understand that sooner or later, inflation introduces all sorts of costly economic distortions and uncertainty.”
(Updates with Daly, Goolsbee and Williams comments from 11th paragraph.)
