Fed Voting Member Harker: Fighting Inflation Requires Faster, More Frequent Small Rate Adjustments, Be Vigilant Against Inflation Expectations Becoming Entrenched

Federal Reserve official Beth Hammack stated that, to prevent high inflation from becoming entrenched in the economy, the Fed should consider making faster and more frequent small rate adjustments, rather than waiting for inflationary pressures to accumulate and then taking larger actions. She believes that inflationary pressures in the U.S. are no longer limited to energy prices, and that increased tariffs and the demand from artificial intelligence infrastructure buildout are also driving up costs. Currently, it is necessary to maintain a restrictive monetary policy.

Hammack is the President of the Federal Reserve Bank of Cleveland and a voting member of the FOMC monetary policy committee this year. On Monday, she delivered remarks at the National Association for Business Economics (NABE) annual meeting in Cleveland, Ohio, focusing on monetary policy communication and outlining her views on inflation and interest rate policy. She did not explicitly advocate for a rate hike at the Fed's October meeting but emphasized that, in order to return inflation to the 2% target in a timely manner, monetary policy needs to remain sufficiently restrictive.

Hammack said, "When conditions permit, I generally believe that smaller and relatively prompt adjustments are preferable to waiting and risking the need for larger corrective measures in the future." This statement highlights her concerns about persistent inflationary pressures and also indicates her preference for controlling inflation through timely, gradual policy adjustments, rather than adopting more aggressive measures after prolonged inaction.

Inflationary pressures have spread beyond the energy sector, with AI investment and tariffs driving up costs

Hammack believes that U.S. inflationary pressures are broad-based, rather than concentrated within a single category of prices. In addition to rising energy prices, cost shocks caused by tariffs, as well as strong demand from artificial intelligence (AI) infrastructure construction, are increasing the difficulty of managing inflation.

She pointed out that businesses are facing repeated cost shocks from multiple rounds of tariff hikes. Although a single tariff increase would theoretically cause only a one-time rise in price levels, if tariffs are raised repeatedly, businesses may repeatedly experience cost shocks and may further pass on increased costs to consumers.

At the same time, AI infrastructure construction is boosting the demand and prices for computers, electronic products, and other high-tech components. These costs not only impact data center projects but could also affect industries such as aviation, power generation, and construction which use similar components.

Hammack warned that persistently above-target inflation could gradually foster an entrenched inflationary mindset, causing businesses and consumers to view higher inflation as the norm. She stated that as high inflation persists, this risk is increasing.

In her view, the current policy needs to impose sufficient constraints on the economy to ensure that inflation returns to the Fed’s 2% target in a timely manner. Even if monetary policy is further tightened, it will take time for inflation to fall back, so the risks of sustained high inflation should not be underestimated.

Prefers timely small adjustments, but does not explicitly support an October rate hike

Hammack’s remarks convey a slightly hawkish policy tone, but do not mean she is explicitly calling for another Fed rate hike this month.

The Federal Reserve previously raised interest rates at its September meeting to address renewed inflationary pressures. Facing upward pressure on energy prices, tariff-induced costs, and demand from AI-related investments, policymakers need to assess whether current rates are sufficient to restrain demand, and determine the timing and magnitude of further tightening.

Hammack’s position is that, if economic and inflation data suggest action is warranted, making smaller adjustments earlier may help avoid the need for larger policy corrections later. She emphasized that monetary policy should respond to changes in economic conditions, and waiting should not be seen as a costless option.

She also previously stated that Fed officials could use economic data to be released before the next policy meeting, scheduled for October 27–28, to further assess economic conditions. The latest U.S. inflation data will be one of the key market focuses.

Investors have recently lowered their bets on an October rate hike by the Fed. According to Wall Street Insights, several Fed officials, including the "No. 2" and "No. 3" at the Fed, have recently sent signals of holding steady, suggesting no urgent need for consecutive rate hikes at two policy meetings in a row. However, Hammack’s speech on Monday indicates that at least some officials remain concerned about persistent inflationary pressures and believe that monetary policy needs to stay sufficiently tight.

Emphasizing policy transparency: explaining the reaction function does not equal committing to a rate path

In addition to inflation and interest rate policy, another focus of Hammack’s speech on Monday was how the Fed should explain policy decisions to the public.

She believes that policymakers have a responsibility to explain why they make specific decisions and which economic data, financial conditions, forecasts, and risks influence their policy judgments. Allowing consumers, businesses, and financial markets to understand the Fed’s decision-making logic helps them make more informed arrangements in an uncertain economic environment.

However, Hammack also stressed that explaining the policy reaction function does not mean making a commitment to the path of future interest rates.

She said policymakers should be cautious about making explicit forecasts about the rate path because economic conditions continue to change, and future policy moves must adjust accordingly. She specifically pointed out: "A reaction function is not forward guidance." If markets interpret officials' explanations of their decision-making logic as commitments to future actions, communications meant to enhance transparency could turn into market misperceptions about the policy path.

This position also touches on how the Fed should balance transparency and policy flexibility. Hammack argues that officials should explain how they make judgments based on data and economic conditions, but such explanations should not become firm commitments regarding future interest rates.

Overall, Hammack’s speech on Monday conveyed two main messages: on the one hand, she believes inflationary pressures have spread beyond energy, and the challenges from tariffs and AI investment demand have made inflation management more complex, requiring monetary policy to remain restrictive; on the other hand, she prefers to take smaller, timelier actions when necessary to reduce the risk of larger corrective moves in the future. However, she did not explicitly call for a rate hike at the Fed’s October meeting, and the direction of future policy will still depend on changes in inflation and other economic data.