Fed’s Hammack, Barkin favor gradual rate-hike path to lower inflation

By John Revill and Michael S. Derby

ZURICH, Nov 5 (Reuters) – Two Federal Reserve officials on Thursday made a case for modest and steady interest rate increases to tackle above-target inflation, in the first round of comments from central bankers after Democrats won control of Congress and made gains at the state level in elections that could change the path of price pressures in the economy. 

“I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner,” Federal Reserve Bank of Cleveland President Beth Hammack said in a speech given before an event in Zurich.

The official, who has been one of the central bank’s most steadfast supporters of boosting short-term interest rates to combat inflation that has overshot the central bank’s target for over half a decade, said she prefers “getting to that stance through more frequent smaller adjustments when possible, something which would be less disruptive to households, businesses, and financial markets.” 

Gradual increases would also help prevent an “inflationary mindset” from taking hold among the general public, Hammack said.

Hammack’s outlook on the rate path was echoed by Richmond Fed President Thomas Barkin. Speaking in Charlotte, Barkin said inflation is “too high” and holding in rather than easing. 

For central bankers, “the implications for policy are pretty straightforward,” he said. When it comes to the pace of future rate hikes, “gradual makes sense.”

MORE GUIDANCE

Last week, the Fed left its benchmark interest rate within the 3.75%-4.00% range, even as policymakers acknowledged that inflation was above where they want it to be. The Fed had raised rates in September and financial markets broadly expect another increase in December, although what happens after that is less clear.

Hammack, along with Fed Governor Lisa Cook, voted in favor of a rate hike last week. The bank president, who also dissented in late July when the Fed left rates unchanged, has argued for some time that monetary policy and the broader scope of financial conditions are not providing the needed restraint on the economy to bring inflation to heel.

That’s underpinned her view the Fed needs to push short-term borrowing costs higher to create the needed level of restraint to help bring price pressures back to target.

The officials’ nod toward gradual interest rate hikes on Thursday comes as Fed Chairman Kevin Warsh has eschewed providing guidance about the future path of policy, believing it’s better for markets to divine their own outlooks rather than relying on the Fed to offer a map.

But even as Warsh has retreated from the debate, many other Fed officials have weighed in about the need for rate hikes and how they might transpire.

NEW LANDSCAPE

Inflation, which had been moving back down to target until President Donald Trump returned to office, heated up again on the imposition of the president’s trade tariffs. This year, price pressures were further exacerbated by Trump’s Middle East war, as well as by hot investment levels in the tech sector, where firms have been in a frenzied buildout of artificial intelligence capabilities.

Democratic capture of Congress was joined by a local pushback by voters against data centers. That could offer some relief on the inflation front as limitations on what tech firms can build could reduce demand for equipment and other related contributors, in turn easing price pressures.

AI capital expenditures “will be slowed down some by permitting challenges in large states including Texas, easing overheating risk in the next year or two and plausibly extending the AI investment cycle,” analysts at Evercore ISI told clients on Wednesday. “This will help keep whole economy demand and supply in balance without many more rate hikes.”

TD Securities said “we remain confident” that the Fed will hike rates a total of half a percentage point by the start of next year. They added, “if the midterm elections result in finding closure on the Iran war and/or the paring back of AI investment, the Fed might not need to tighten policy any further after March.”

Tech stocks were selling off on Thursday, with the Nasdaq down 10% from its record close nearly a month ago as investors fretted over the outlook for AI firms given the shift in political currents. The S&P 500 was also flirting with notable losses Thursday, while the yield on the 10-year Treasury note moved up.

Investors have also been paring back bets on tighter monetary policy though a near-term rate hike remains a solid bet. Futures market traders are still betting on a December increase, though pin the probability at around 70% now compared with more than 80% on Wednesday.

The Fed outlook faces a fresh test on Friday from government jobs data. A poll of economists sees hiring up by 65,000 in October after September’s tepid 29,000 gain. The jobless rate is seen holding steady at 4.2%.

Fed officials have said for some time that the relative stability of the job market allows them the space they need to bring inflation back to target, and they do not see the employment sector as a driver of price pressures. That said, more tepid job gains could create harder choices for interest rate policy. 

(Reporting by Michael S. Derby and John Revill; Additional reporting by Howard Schneider and Ann Saphir. Editing by Paul Simao and Andrea Ricci )