By Howard Schneider
CLEVELAND, Oct 12 (Reuters) – Cleveland Fed President Beth Hammack said on Monday the US central bank should move “relatively quickly” to a restrictive monetary policy stance in order to control inflation she feels has become more broad-based and is starting to influence firms’ price-setting plans.
“I see inflation pressures as relatively broad-based rather than concentrated in one component. Energy has been making headlines this year, with prices rising for oil, retail gasoline, and diesel, but it isn’t the whole story,” Hammack said in remarks prepared for delivery to a National Association for Business Economics conference. Her remarks cited recent conversations in her district with firms planning to boost prices faster than their input costs are rising.
“A restrictive monetary policy stance is appropriate to ensure a timely return to 2% inflation,” Hammack said. “When feasible, I generally think it’s preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction” if inflation becomes more persistent or inflation expectations start to rise.
She said research by her staff puts underlying inflation currently in the mid-to-high 2% range, and “my baseline forecast is that it will take some time for inflation to return to 2%, even with appropriate monetary policy.”
“Demand-side pressures coming from the AI buildout are raising prices on key computer, electronic, and high-tech components. This is raising costs for data centers, yes, but also for projects that use similar components in aviation, electricity production, and construction,” Hammack said.
Current data does not point to “an economy in which the crew are exhausted and the boat is taking on water. It reads, instead, as one that can handle a tighter hand on the tiller to finish the job on inflation,” Hammack added.
Investors expect the Fed to keep its policy rate in the 3.75%-4.00% range at its October 27-28 meeting. Hammack, a voting member of the central bank’s policy committee, has been among the more hawkish Fed voices, and dissented in favor of raising rates at the meeting in July.
Her colleagues, including Fed Chairman Kevin Warsh, joined her in voting to raise rates in September.
Hammack also said she felt it was important for policymakers to continue explaining their views, in particular providing their likely reaction to different economic data.
Warsh has said he prefers a “quieter” Fed and is particularly opposed to forward guidance, or firm commitments to future policy decisions.
Hammack said providing a “reaction function,” however, was important so households and firms could understand how policymakers are processing new data and plan appropriately.
“I have a responsibility to the public to explain why I make the decisions I make. Transparency has the benefit of allowing consumers, businesses, and financial markets to make better-informed decisions,” she said.
(Reporting by Howard Schneider; Editing by Paul Simao)
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