Federal Reserve Bank of Cleveland President Beth Hammack said she’s keeping an open mind about the direction of interest rates because of uncertainty over President Donald Trump’s policies and how they will affect the economy.
Hammack mapped out multiple potential scenarios that might demand a range of responses, from rate cuts to rate hikes, and emphasized she doesn’t have a high level of confidence over which is most likely.
“The cone of possibilities is very wide right now,” Hammack said Wednesday during an interview with Bloomberg News in Columbus, Ohio. “There are a lot of different potential outcomes that are available, and so we need to be open-minded about the different possibilities that could unfold.”
Hammack’s scenarios include one in which the Fed may need to cut rates — if the labor market deteriorates quickly and there is reason to think the inflationary effects from tariffs will be temporary.
But she also sees a possibility the Fed may need to raise rates if inflation, and expectations about future prices, rise substantially and employment remains solid.
Between those is a third possible outcome in which inflation rises meaningfully but employment weakens. That would make for difficult choices, Hammack said, because it would put the Fed’s mandates — to pursue price stability and maximum employment — in conflict.
In that case, she said, officials would need to gauge how far they are from each of their mandates and estimate how long it would take for each side to return to target.
“That’s where we really need to understand what that magnitude and persistence of the misses are,” she said.
Balancing Risks
The Cleveland Fed chief said the risks to inflation and employment are more balanced now than they were in December, when she dissented against a quarter-point rate cut. At the time, she believed the labor market was strong and much more work was needed on inflation. While inflation is still above target, there has been some progress since December and employment has remained stable, she said.
Now, it’s too soon to know whether the labor market or prices will be affected more by the changes to trade, immigration regulation and fiscal policies, she said. “It’s hard to have conviction in a base case,” Hammack said.
In a speech earlier on Wednesday, Hammack said she saw a “strong case” for holding rates steady to balance the risks of potentially higher inflation against a slowdown in the labor market. In the interview, Hammack said holding rates steady could be appropriate if there is only a modest rise in inflation and the jobs market remains stable.
She also said it’s possible a weaker labor market could offset some price pressures. “The theoretical models would tell you that if you have higher inflation and lower employment, that those two forces tend to work against each other to kind of bring you back into balance,” she said.
Financial Markets
Hammack reiterated her view that financial markets are functioning well despite a recent spike in volatility in response to Trump’s shifting trade policies. She said markets have been more stable in recent days and she hasn’t seen anything to suggest the Fed would need to intervene.
The Fed official also said she supported the decision in March to slow the pace of the balance-sheet runoff. In April, policymakers lowered the amount of Treasuries allowed to mature without being reinvested to $5 billion from $25 billion. The Fed left the cap on mortgage-backed securities unchanged at $35 billion.
“I think it is the next logical step in the normalization,” said Hammack. “It wasn’t clear to me that we had to make that decision at our last meeting, but I was supportive of making that decision because we will need to make that at some point and it seemed like a reasonable time to do it.”
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