MNI: Fed May Be In Holding Pattern Quite Some Time - Hammack

U.S. interest rates may be kept steady at 4.25%-4.5% "for some time" if uncertainty over President Donald Trump's tariffs weakens the health of the labor market and keeps inflation above the Fed's 2% target, Federal Reserve Bank of Cleveland President Beth Hammack said Tuesday. 

"When clarity is hard to come by, waiting for additional data will help inform the path ahead. It may well be the case that policy remains on hold for quite some time before the Committee initiates very modest cuts to return policy to a neutral setting," she said in remarks prepared for the Barclays-CEPR Monetary Policy Forum in London.  

"Given the resilience of the economy thus far, the risks from maintaining the current policy setting appear low, and I don’t see a weakening in the economy that would merit imminent rate cuts, though I remain attentive to that possibility."  

The current policy stance is "only modestly restrictive," she said, noting consumer spending and business fixed investment have grown at a solid rate and job gains have been healthy enough to keep the unemployment rate steady at 4.2% in May. 

Headline PCE inflation is likely to edge higher to 2.3% in May and core somewhat higher than that, indicating "some distance to go" before the Fed meets its price stability mandate. 

"The labor market has been healthy, and inflation has come down only slowly under the current setting. This feels to me like policy is already close to neutral," Hammack said. 

Business contacts in the Cleveland Fed district indicate they have paused some spending in light of increased uncertainty over tariffs, immigration, and federal spending, she said. While low consumer sentiment has not yet shown up in the spending data, retailers expect customers will pull back when prices rise due to tariffs.

"if both sides of our mandate come under pressure, then holding the policy rate steady for some time may be the best choice to balance the risks coming from further elevated inflation and a slowing labor market," Hammack said. 

"Unlike in an American rom-com, I see no neat and tidy way for monetary policy to make a 93-minute exit from its current holding pattern." (See: MNI INTERVIEW: Fed Will Face ‘Tough Calls’ In H2-Holtz-Eakin)