Fed’s Hammack still focused on inflation, calls for caution in easing policy

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By Dan Burns

(Reuters) -The Federal Reserve needs to be “very cautious” in removing restrictive monetary policy with inflation still above the central bank’s 2% target and remaining persistent, Cleveland Fed President Beth Hammack said on Monday.

“I think we are only a short distance to neutral, and it worries me that if we remove that restriction from the economy, things can start overheating again,” Hammack said in remarks that showed the divisions inside the Fed over whether interest rates will keep falling.

Hammack’s comments at an event at the Cleveland Fed headquarters followed last week’s decision by the Federal Open Market Committee – the Fed’s interest-rate-setting panel – to lower the central bank’s benchmark rate by a quarter-percentage point to a range of 4.00%-to-4.25%.

Hammack, among the most hawkish Fed policymakers, is not a voter on policy this year and did not say whether she supported the reduction. But in her remarks she emphasized that inflation remains a significant concern for her, while she sees the job market as remaining closer to the Fed’s “maximum employment” mandate, even if there are emerging signs of fragility.

The latest unemployment rate at 4.3% “is right around a maximum employment number,” Hammack said, and while it may edge up this year it is expected to fall again before long. “On the inflation side, we are missing by a more meaningful number, by a full percentage point. And we have been missing for four-and-a-half years, and I anticipate missing for the next couple of years.”

“I think we should be very cautious in removing monetary policy restriction because I think it’s important that we stay restrictive to bring inflation back down to target,” Hammack said.

Along with their decision on interest rates, Fed officials last week updated their quarterly economic and policy projections.

The median expectation among the 19 officials showed an expectation for rates to drop by another half a percentage point this year, but nearly half of them did not see that as appropriate. Six of them saw the current level as appropriate through this year, and two others saw only one more quarter-point reduction this year as appropriate. Another official felt the level of rates prior to last week’s reduction was the appropriate level.

Part of the judgment in rate decisions involves policymakers estimating how far current policy is from the so-called neutral rate of interest that neither stimulates nor restricts economic activity.

“I have one of the higher estimates on the committee, and I think we’re only very mildly restrictive after last week’s move” Hammack said. “So I think we are a very short distance to neutral.”

(Reporting by Dan Burns; Editing by Andrea Ricci)