MNI BRIEF: Fed's Hammack - Rates Policy 'Barely Restrictive'

Federal Reserve Bank of Cleveland President Beth Hammack said Thursday interest rates should stay where they are to ensure inflation returns to goal, adding monetary policy is "only barely restrictive, if that." 

"At this point, I don’t think there is more that monetary policy can do without risking a fall off the wire," she said in remarks prepared for a talk at the Economic Club of New York, referring to the balancing act of setting policy when both inflation and employment are moving away from goal.  "Comparing the size and persistence of our mandate misses and the risks, inflation is the more pressing concern. This argues for a mildly restrictive stance for our policy rate to ensure that inflation returns to 2% in a timely fashion."

Inflation could exceed the Fed's 2% goal for the better part of a decade if her forecasts are accurate, she said. Tariff changes have been "large, dynamic and ongoing, far from a textbook implementation" and business leaders have told the Cleveland Fed they will likely have to raise prices early next year in spite of a softer demand environment. 

Meanwhile, labor market conditions remain generally healthy -- though there is a risk of further slowing, said Hammack, who will have a vote on rates next year. GDP and the unemployment rate are right around their longer run levels, and model-based estimates put the neutral rate around 1.4%-1.5%, higher than after the financial crisis and rising, she said. Broad financial conditions also appear to be "quite accommodative," she said. 

"Without appropriately restrictive policy, this long stretch of elevated inflation could eventually cause high inflation to become embedded into the economy." (See: MNI INTERVIEW: More Fed Cuts Risk Inflation Spike-Weinberg)