Hammack Interest Rates Call: Fed Misses 2% for 5.5 Years

Cleveland Fed President Beth Hammack said Monday that interest rates need to be higher. The Hammack interest rates comments matter for FX traders because the Fed has missed its 2% inflation goal for five and a half years.

Key Takeaways

Tighter policy call: Hammack said more economic tightness is needed to bring inflation down.
Trend inflation: She puts underlying inflation in the mid-to-high 2% range, above the Fed's goal.
Broad pressures: Price pressures now extend beyond energy, and strong demand is adding to them, she said.

What Happened

Hammack, President of the Cleveland Federal Reserve, said inflation remains "too high." She argued that the economy can handle tighter policy.

In her view, financial conditions are neutral and the job market is steady. She said that gives the Fed scope to tackle inflation.

Hammack prefers frequent, "smaller policy rate changes." She also wants the Fed to act relatively quickly.

Background

Hammack warned against assuming that inflation expectations are anchored. She said firms are planning price increases that go beyond rises in their input costs.

The Fed's policy-setting FOMC has 12 officials: seven Board members, the New York Fed president and four of the remaining 11 regional presidents, who serve one-year rotating terms. It holds eight policy meetings a year. The Fed raises rates when inflation is above 2%, which tends to strengthen the U.S. dollar. Rate cuts tend to weigh on it.

Market Impact

USD/JPY: The pair is range-bound above 158.00, and softer U.S. bond yields cap its upside.
AUD/USD: The pair traded below 0.7000 in the Asian session and filled a modest bearish gap. A U.S. dollar bounce and falling yields from multi-year highs limit the move.
Gold: Gold is near $4,170 and under mild selling pressure. The U.S. dollar is advancing modestly on bets that the Fed will hike at least once more before year-end.
Bitcoin: Bitcoin is around $83,600 after a 3.1% correction last week. U.S.-listed spot Bitcoin ETFs saw a $681.10 million outflow last week, snapping a three-week inflow streak.

What to Watch Next

RBA November decision: Odds of another Reserve Bank of Australia hike are diminishing, which caps the Australian dollar.
Holiday liquidity: Holidays in Japan and the U.S. are keeping trading thin, so moves in USD/JPY and gold can be exaggerated.
Yen intervention talk: There is speculation that authorities will step in to support the Japanese yen. The facts give no detail on who or when.

Bottom Line

Hammack has added a hawkish voice to the Fed debate, arguing that broad inflation and steady jobs leave room to tighten. For USD/JPY, AUD/USD and gold traders, the link between U.S. yields and Fed hike bets is the main channel in play.

Hammack Interest Rates View: Fed Needs Tighter Policy