Fed's Hammack warns rate hikes may be needed as PCE hits 3.8%

Cleveland Fed President Beth Hammack warned Tuesday that the central bank may need to raise interest rates soon, flagging April's 3.8% personal consumption expenditures price index as evidence inflation remains stuck well above the 2% target.

"Based on available data, my concern about the risk of persistently high inflation far outweighs my concern about the risk to maximum employment," Hammack said at a Cleveland event. "I also worry that the current stance of monetary policy may not be restrictive enough to bring inflation back to 2%."

The April PCE reading marked the largest annual gain since 2023 and the fifth consecutive year inflation has run above the Fed's target. Hammack described price pressures as "relatively broad," spanning goods and non-housing services, rather than concentrated in a few categories. The fed funds rate stands at 3.50% to 3.75% after the Federal Open Market Committee held steady in an 8-4 vote on April 29 — the first time more than three decades that four officials dissented. Hammack was among the three regional bank presidents who voted against the post-meeting statement because it retained language suggesting an eventual easing bias.

The hawkish shift carries high stakes for financial markets. The CME Group FedWatch Tool assigns a near 100% probability the FOMC will hold rates at its June 16-17 meeting — the first chaired by Kevin Warsh, who took office May 22. But John Briggs, head of U.S. rates strategy at Natixis, said investors should brace for a more aggressive path. "If the Fed is going to raise rates because of inflation worries, it's not going to do it once," Briggs said. "It's going to do it two or three times."

Price Pressures Broaden Beyond Shelter

Hammack said the current inflation dynamic differs from earlier post-pandemic episodes because price increases are no longer concentrated in a few categories. The 3.8% PCE reading reflects broad-based gains across goods and non-housing services, she said, suggesting the economy may be experiencing a more persistent inflation regime than the transitory supply-shock episodes of 2022-2023.

The labor market, by contrast, appears stable. The April unemployment rate of 4.3% is "roughly consistent" with the Fed's definition of maximum employment, Hammack said, indicating the economy has achieved a rough balance between labor supply and demand. That resilience gives policymakers room to focus squarely on inflation without fearing immediate damage to the jobs market.

Warsh Era Begins With Hawkish Crosscurrents

The June 16-17 FOMC meeting will be the first under Chair Kevin Warsh, who succeeded Jerome Powell on May 22. Warsh, a former Fed governor who campaigned on lower rates, has said he did not discuss interest rate policy with President Donald Trump during the interview process. But the geopolitical backdrop has complicated his dovish mandate: the Iran War has pushed oil prices higher, lifted bond yields and raised inflation forecasts across the board.

Fed Governor Christopher Waller echoed Hammack's concerns in prepared remarks on May 22, saying he "can no longer rule out rate hikes further down the road if inflation does not abate soon." The April FOMC minutes, released May 20, showed "a majority of participants" highlighted that some policy firming would become appropriate if inflation persisted above 2%.

The last time the FOMC saw this level of internal dissent — four dissenting votes at a single meeting — was more than 30 years ago, underscoring the depth of the divide over the policy path. Overnight index swap markets currently price a prolonged hold, but those expectations could shift rapidly if the June statement drops the easing bias language that Hammack and her fellow dissenters opposed in April.

This article is for informational purposes only and does not constitute investment advice.