Cleveland Fed President Beth Hammack has spent over a year warning about the risks of persistently high inflation, urging her fellow policymakers to take action.
Hammack, who started as president and chief executive officer of the Cleveland Fed in August 2024, is currently a voting member of the Federal Open Market Committee. Now with one rate increase behind the Fed and more likely to follow, Barron's sat down with Hammack for an exclusive interview on how she views the current risk of inflation and how she would like to see the path of policy develop.
Barron's: You've been advocating for nearly a year that the Fed move to a more restrictive policy. What were the early warning signs that you were watching that showed inflation was the bigger, potentially more pressing issue than the labor market?
Beth Hammack: For me, a big part of my process is just being out in the district and talking with businesses and individuals -- that's really where I was hearing it from. I was hearing that inflation has continued to be too high. It's been five and a half years since we've hit our target. And it really has started to become really difficult. We had lunch with a group of low- and moderate-income workers talking about how they were experiencing things a week or two ago. These are people who are working decently good jobs, earning between $40,000 and $60,000 a year. What I'd heard a year ago was that people were trading down. First we heard they went from steak to hamburger to beans and pasta. Now, in that room, people were talking about not trading down anymore, they're juggling.
I'm also reaching out to businesses, hearing how businesses are thinking about their input cost pressures -- how much of that they can pass on. I think more recently what I've heard is that input costs are going up, but there's a concern that there'll be other pricing pressures coming from unknown places and so they're adding in extra to preserve their margins. Initially when some of these shocks hit, a number of businesses were a little bit more cautious in passing on prices. What I've heard more recently from businesses, and this is largely like manufacturing businesses, is that they have to pass it on. Last week we were out with a manufacturer who was talking about it how it used to be people cared about quality, price, availability, and now those last two have flipped. It's more important to get something soon and they're willing to pay more for it if they do that.
That's obviously going to potentially weigh on pricing pressures?
Exactly. What's holding the businesses accountable? If the pricing issue isn't the governor of how much demand you have, then inflation could move up more quickly or could move further. Or even just be sustained around those [current] levels.
What told you early on that policy might not be restraining the economy?
It's talking to businesses and it's seeing what's happening in markets. And what I've been seeing is that there's record debt issuance. We've got trillion-dollar equity IPOs. Capital is highly available and businesses are taking advantage of it. They're looking at where all this demand is coming from and they want to continue to invest in their business. They want to continue to invest in growth. And that's a good thing overall for the economy.
What I want to do is just, at the margins, kind of soften it a little bit so that you don't have this full steam ahead pressure. So that it's a little bit more tempered. That could help to relieve some of that pressure off the inflation.
With that in mind, should the Fed raise rates again in October?
I go into every meeting with an open mind. We have a really robust discussion at the table. That said, we have been missing on our inflation forecast for quite some time.
Even more so than the history [of inflation], it's really about my forecast and the future of where I think we're going. And with the current policy stance, I think it's going to take us longer than what I would think was acceptable to bring it back down.
When that next hike comes is a question mark. I think we need to get policy to be restrictive. So I think more tightness is needed in the economy. I personally prefer doing smaller moves more frequently because I think that helps businesses and households to plan and to see things coming.
But that doesn't mean that you have to go at [hike] every meeting. So again, I'm keeping a pretty open mind around what the right timing is. And continuing to collect data on how things are changing and how things are migrating.
You've stressed the duration of elevated inflation is a substantial risk, but the committee's latest summary of economic projections forecast that inflation would not return to 2% until 2029. What risk does that pose if we're still above 2% for three more years?
I think the biggest risk is this inflationary mindset. I think the fact that individuals and businesses could become tolerant of inflation, could accept inflation at these higher levels. If that starts feeding into expectations, we know it's much more difficult for us to do our jobs and to bring inflation back down to target if people's expectations have shifted.
Do you think that that's already happening?
I've seen small pieces of evidence. We're out in the district constantly trying to collect these anecdotes. I do hear one or two of those. I wouldn't say it's the majority of what I'm hearing from the public at this point. But I'm listening for that. If it shifts to become more of the predominant story, that's going to be a bigger source of concern for me.
How much signal are you taking from markets, particularly the bond market, right now?
I still talk to a bunch of people in markets, even though I'm no longer unpacking markets in the same way as I used to. But I'm hearing a lot of different reasons why bond yields have risen. I think first and foremost is just growth expectations. I think broadly, if you look at whether it's equity earnings or just corporate earnings generally, we're seeing strong growth. It's coming from a number of different segments, largely driven by the data center boom, but that's having implications for other segments around that as well.
Then I think there's the repricing of Fed policy because of those growth expectations. That's factoring into it. I think -- less so in the U.S., maybe more so in Europe -- you're seeing fiscal concerns. That's driving higher yields. And of course, while I primarily care about what's happening in the U.S., I do pay attention to what's happening globally and certainly investors are going to care about what's happening in global markets. Higher yields overseas may be having some spillovers into the U.S.
The last factor I think is just the significant amount of debt issuance that's been brought this year. The hyperscaler issuance is probably a bigger impact in Europe than it is in the U.S., just given the size of issuance there versus here and proportional to the market. But I think there's a confluence of factors that are driving things. And so it's something that I watch.
Given the yield move we've seen over the past quarter, I think financial conditions now look to be closer to neutral given that sharp move. But again, I think we need to be restricted to bring inflation back down to zero.
More restrictive than simply allowing the bond market to do the Fed's job?
The bond market is a compliment to our work. The bond market moves in higher frequency than we move. It incorporates a lot of information in real time. Some of that information is about the real economy. Some of that information is about what the Fed will do on the back of it. And so to me, the markets are a good compliment to us, but they are not a substitute.
What are you thinking about as you come to the end of your current voting term? Do you consider this past year a success?
I'll be satisfied when inflation comes back down to target. So there's a long way to go to get there.
There's really not much of a difference in being a voting member and not being a voting member. I know outside the room, people put like a lot of different currency in the roles, but the truth of the matter is that, in the room, you wouldn't know the difference of who's voting or who's not voting until the very last 60 seconds of the meeting when they call out names and 12 names say yes or no.
The role is the same. It's to collect as much information as I possibly can about what's going on in the economy, to try to unpack it with as much nuance and thought and skill to be able to deliver on that dual mandate and to be able to serve the public.
How concerned are you about Fed independence?
I think Fed independence is always of paramount importance. And there are moments when we spend more time talking about it, and less time talking about it. Part of my role, I think, being out and talking with the public is to explain to them not just how I'm seeing the economy, it's not just to hear from them how they're seeing the economy, which is critically important for me. It's also to explain to them the importance of that independence so that they recognize all the different things that we're doing at the Federal Reserve and how that accrues to their benefit.
Do you think that the public really does understand that, or is it a work in progress?
I think it's a work in progress. I think it's a work in progress that requires constant investment.
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