Beth Hammack: The Fed must raise interest rates to rein in economic growth and inflation

Cleveland Federal Reserve Bank President Beth Hammack said the Federal Reserve should raise interest rates now to curb economic growth and inflation. In her view, the current monetary policy stance does not restrain demand enough, while inflation remains too high and has not returned to the Fed’s 2% target for more than five years.

Hammack reaffirmed the position she took at the Fed’s most recent meeting. In July, she and two other regional Reserve Bank leaders dissented from the decision to keep the rate in the 3.50–3.75% range, preferring a 25-basis-point increase.

According to Hammack, the latest macro data point to some easing of inflationary pressure. However, she does not consider this sufficient grounds to conclude that inflation is steadily moving toward 2%. In July, U.S. consumer prices rose 3.4% year over year after a 3.5% increase in June, while core inflation slowed to 2.5%.

The Cleveland Fed chief believes economic activity remains too strong for inflation to decline sustainably without additional monetary tightening. In particular, she is concerned about elevated levels of corporate borrowing and investment.

She also pointed to the real-world effects of persistent inflation on U.S. households. High food and gasoline prices are forcing families to cut spending, forgo some types of leisure, and seek additional assistance. Therefore, Hammack argues, an overly slow return of inflation to 2% is itself a source of economic problems.