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Fed’s Hammack warns persistent inflation could make return to target harder

  • Hammack says inflation remains elevated as demand and economic activity stay solid.
  • The policymaker sees inflation risks as tilted to the upside.
  • Persistent price pressures could make inflation increasingly difficult to bring back to target.

Cleveland Federal Reserve (Fed) President Beth Hammack warned on Thursday that inflation remains elevated in the United States (US), stressing that persistent price pressures could make the Fed’s task increasingly difficult.

Speaking on monetary policy, Hammack emphasized that price stability is the responsibility of central banks and noted that inflation remains elevated against a backdrop of solid output and demand, according to Reuters.

The Cleveland Fed President added that risks surrounding inflation are tilted to the upside, while supply shocks currently represent a notable challenge for monetary policy.

Hammack also warned about the consequences of allowing above-target inflation to persist. According to the policymaker, the longer inflation remains elevated, the harder it becomes to bring price growth back toward the central bank’s target.

Fed’s Hammack flags upside inflation risks, keeping Dollar bulls alert

Fed’s Hammack speech scores 7.4/10 on the FXS Speechtracker, a touch softer relative to the historical average of 7.6/10 but still firmly hawkish in tone.

The FXS Fed Sentiment Index slipped by 0.46 points to 148.18, indicating a modest pullback in hawkish intensity versus recent communications. However, with the index still far above the neutral 100 threshold, the Fed remains in clearly hawkish territory despite the slight easing in tone, and the combination of elevated index levels and a strong FXS Speechtracker score continues to underpin a constructive bias for the Dollar.

Market reaction

The US Dollar (USD) shows little reaction to Hammack’s comments, with the US Dollar Index (DXY) maintaining its upward bias on Thursday. The index, which tracks the Greenback against a basket of six major currencies, gains 0.14% on the day to trade around 101.25 at the time of writing. Expectations for further Fed tightening are already elevated, potentially limiting the immediate impact of Hammack’s remarks. According to the CME FedWatch tool, investors now assign a roughly 71% chance to another rate hike at the October meeting, up from around 55% a week earlier.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Author

Ghiles Guezout

Ghiles Guezout is a Market Analyst with a strong background in stock market investments, trading, and cryptocurrencies. He combines fundamental and technical analysis skills to identify market opportunities.

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