• Federal Reserve Bank of Cleveland President Beth Hammack expresses concern that current monetary policy may not be sufficiently restrictive to bring inflation back to the 2% target.
  • Hammack's remarks come amid signs of persistent inflation, with core PCE still above 3% and labor market tightness fueling wage growth.
  • Markets are now pricing in a lower probability of rate cuts in 2024, with the first reduction fully priced only for December.

A Hawkish Warning from Cleveland

Federal Reserve Bank of Cleveland President Beth Hammack said Thursday she is worried that monetary policy may not be tight enough to lower inflation to the central bank's 2% goal, delivering a hawkish surprise to markets that had been betting on an imminent pivot to rate cuts.

"I am concerned that policy may not be as restrictive as some models suggest," Hammack said in prepared remarks to the Columbus Chamber of Commerce. "While we have made progress on inflation, it remains too high, and we need to see consistent evidence that price pressures are sustainably moving toward our target."

Hammack's comments contrast with those of other Fed officials who have recently signaled openness to cutting rates later this year. The Cleveland Fed chief, who votes on policy this year, emphasized that she needs to see "several more months" of favorable inflation data before she would be comfortable easing.

Sticky Inflation and a Strong Labor Market

The policymaker pointed to recent data showing that the core personal consumption expenditures price index — the Fed's preferred inflation gauge — is still hovering around 3.0%, well above target. She also noted that the labor market remains "very tight," with wage growth running at a pace inconsistent with 2% inflation.

"The economy is still generating strong job gains, and nominal wages are rising at around 4% annualized," Hammack said. "That kind of wage growth, if sustained, could keep services inflation elevated."

Market Reaction

Treasury yields jumped after Hammack's remarks, with the 2-year note rising 5 basis points to 4.92% and the 10-year note climbing to 4.57%. Futures markets now see only a 50% chance of a rate cut by September, down from 70% earlier this week. The S&P 500 trimmed gains but remained in positive territory.

Analysts at Goldman Sachs said in a note that Hammack's comments "underscore the hawks' determination to keep the door open for further tightening if needed."

A Broader Debate

Hammack's stance places her on the hawkish end of the Federal Open Market Committee, which has been divided over the path of policy. Chair Jerome Powell has said the Fed needs "greater confidence" that inflation is moving sustainably down before cutting rates.

"The risk that inflation reaccelerates is real and cannot be dismissed," Hammack said, echoing concerns raised by some colleagues that the last mile of disinflation could prove stubborn.

What's Next

Investors will scrutinize the Fed's next policy decision on May 1, where the central bank is widely expected to hold rates steady at 5.25%-5.50%. The Fed's quarterly Summary of Economic Projections, also due then, will be key for assessing whether the median dot shifts higher.

"Without a more pronounced slowdown in growth and hiring, I don't see how the Fed can cut rates this year," said James Bullard, former St. Louis Fed president, in a Bloomberg interview. "Hammack's caution is warranted."

The Cleveland Fed did not immediately respond to a request for additional comment on Hammack's remarks.

Correction: An earlier version of this article misstated the timing of the first fully priced rate cut. It has been corrected to December 2024.