Fed’s Hammack Says Rates on Hold, Not Meaningfully Restrictive
(Bloomberg) -- Federal Reserve Bank of Cleveland President Beth Hammack said interest rates are not “meaningfully restrictive” and should be held steady for some time as officials wait for evidence inflation is returning to their 2% target.
Hammack also said it will be important to monitor inflation expectations and other metrics to evaluate if financial conditions are consistent with the Fed’s efforts to cool price growth.
“I believe that monetary policy has the luxury of being patient as we assess the path forward, and this will likely mean holding the federal funds rate steady for some time,” Hammack said Thursday in remarks prepared for a conference in New York.
Hammack’s message fit in with a bevy of Fed officials who also spoke on Thursday. None signaled a desire to cut rates anytime soon, though they offered varying degrees of caution in their outlooks for the economy.
Jeff Schmid, president of the Kansas City Fed, sounded a more worrying note, triggered by a recent rise in inflation expectations and concerns over growth.
“While the risks to inflation appear to be to the upside, discussions with contacts in my district, as well as some recent data, suggest that elevated uncertainty might weigh on growth,” Schmid said at an event in Arlington, Virginia. “This presents the possibility that the Fed could have to balance inflation risks against growth concerns.”
On the more optimistic side, Philadelphia’s Patrick Harker reiterated his confidence that the Fed’s current policy stance would be enough, given some patience, to bring price pressures under control.
“The policy rate remains restrictive enough to continue putting downward pressure on inflation over the longer term, as we need it to, while not negatively impacting the rest of the economy,” Harker said.
Waiting on Inflation
Fed officials left rates unchanged last month after reducing borrowing costs by a full percentage point late last year. Policymakers have said they want to see more evidence inflation is on track to reach the central bank’s 2% target and more clarity on President Donald Trump’s plans for the economy.
The Cleveland Fed chief said it could take time to see the effects of last year’s rate cuts on the economy and added it is possible “an acceleration in activity could slow or stall the disinflationary process.” She also said interest rates may already be “close to a neutral setting” — a stance of policy at which rates are neither slowing nor stimulating the economy.
Her remarks clashed with comments from Fed Chair Jerome Powell last month, in which he said interest rates were still “meaningfully restrictive” following last year’s rate cuts.
Hammack has previously said rates should remain on hold for “some time” while officials await more progress on inflation. The Cleveland Fed chief dissented in December against the decision to lower rates by a quarter percentage point, saying she preferred to leave rates steady until price pressures cooled further.
An update on the Fed’s preferred inflation metric, the personal consumption expenditures price index, is due Friday. Officials will gather for their next policy meeting March 18-19.
Financial Risks
Hammack devoted much of her remarks to topics related to financial stability, touching on hedge-fund leverage, the growth of non-bank lending — including so-called private credit — and the US Treasury market.
On private credit, she emphasized the lack of transparency, growing size and links to insurance and pension funds.
“It is worth considering what the implications of large losses at pensions and insurers during an economic downturn could be and whether these risks would spill into the broader financial system,” Hammack said. “We need to consider the broader consequences of regulations that shift lending outside the banking sector.”
She also took aim at the apparent role of bank regulations imposed since the 2007-08 financial crisis in discouraging market making in the $28 trillion US Treasury market, which has reduced the market’s liquidity during crises.
“Recent research has documented the potential for growth in US Treasury markets to surpass dealers’ capacity to effectively and safely intermediate in both cash and repo markets,” she said. “This situation suggests that we need to weigh the costs and benefits of dealer constraints such as the supplementary leverage ratio, or SLR, and Tier 1 leverage.”
--With assistance from Amara Omeokwe and Catarina Saraiva.
(Updates with remarks from two other Fed officials from fourth paragraph.)