Fed's Hammack warns inflation expectations deterioration could require Fed response

Federal Reserve Bank of Cleveland President Beth Hammack stated on Thursday that a deterioration in public inflation expectations could necessitate more aggressive action from the central bank. Speaking at a Goldman Sachs event in New York, Hammack expressed concern that if inflationary mindsets become entrenched, it would make monetary policy's work harder and potentially require larger adjustments than if such expectations were not present.

Hammack noted that persistently high inflation risks normalizing elevated prices for the American public, a situation the Fed must prevent. She indicated that current monetary policy may not be sufficiently restrictive, despite businesses reporting minimal concerns about borrowing costs impacting investment outside of housing. The official highlighted that inflation is broad-based and warned that prolonged high inflation increases the risk of it becoming embedded in wages and contracts, creating a self-reinforcing cycle.

She also commented on rising government bond yields, attributing them more to real rates moving up than inflation expectations, reflecting a solid economic outlook and strong tech sector investment.