WRAPUP 1-Two Fed dissenters say higher interest rates needed to combat inflation

Two Federal Reserve officials, Beth Hammack and Neel Kashkari, urged an interest rate hike to combat stubborn inflation above the 2% target, citing economic stability and job market resilience.

Two of the three Federal Reserve officials ‌who ​dissented at this week's policy meeting in favor of an interest rate hike said on Friday that action is needed now to bring inflation back down to the U.S. central bank's 2% target. "Inflation has remained stubbornly above 2% for more than five years, and I am not confident it will return to our objective on ‌its own," Cleveland Fed President Beth Hammack said in a statement released by her regional bank.

"A higher federal funds rate would help restrain economic activity and reduce inflationary pressures" and the economy can deal with higher interest rates given the stability of the job market, Hammack said. "I preferred to move at our recent meeting because I did not see the current policy stance as appropriately restrictive." In a separate statement, Minneapolis Fed President Neel Kashkari also expressed concern about ‌inflation and said the Fed should have raised rates on Wednesday as the first in a series of hikes. "To manage against the risk that high inflation could become entrenched, I would rather tighten policy incrementally ‌as we gather more data on the path of inflation and employment," Kashkari wrote.

"If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," Kashkari said. If inflation were to cool, the Fed could slow or pause the rate hikes "without unnecessary impact on the real economy," he added. Hammack has hawkishly dissented in three of eight policy meeting votes while Kashkari has dissented six times in 30 votes, according to Wrightson ICAP. Dallas Fed President Lorie Logan was ⁠the third ​policymaker to support raising the central bank's benchmark interest rate ⁠by a quarter percentage point from its current 3.50%-3.75% range this week. The vote in favor of holding rates steady was 9-3. STICKY INFLATION The outcome of this week's policy meeting was unusually uncertain as new Fed Chairman Kevin Warsh has refused to provide insight into his monetary ⁠policy outlook. Financial markets had priced in the possibility of a rate hike on Wednesday and broadly expect the Fed will raise rates at its September 15-16 meeting. The central bank's preferred inflation gauge — the Personal Consumption Expenditures Price Index — rose 3.7% on ​a year-over-year basis in June and continues to face upward pressure. Warsh's assertions on Wednesday of the need to tame inflation with no action to move it toward the 2% target and a hint ⁠that the goalposts themselves may change helped send 30-year Treasury yields above 5.2%, a 19-year high. They extended their rise on Thursday and Friday. While inflation has moderated substantially from the levels seen during the COVID-19 pandemic, it has remained stubbornly above the Fed's target due in part to ⁠President ​Donald Trump's import tariffs and the sharp rise in energy prices resulting from the war in the Middle East. Inflation is also being pressured higher by investment related to the artificial intelligence sector. The generally supply-related nature of the current inflation problem is particularly challenging for the Fed because its policymakers would traditionally hold off on any action in such a situation.

Kashkari said he agrees with the idea that monetary policy faces trade-offs when dealing ⁠with supply shocks. But he noted, "I increasingly believe that monetary policy does have an important role to play in addressing a series of successive supply shocks that might lead to entrenched higher inflation." The Minneapolis Fed ⁠president also said the 1970s inflation surge was largely supply-driven ⁠and officials "ultimately concluded that tight monetary policy was necessary to bring inflation back down despite their original supply-shock diagnosis." Warsh, speaking to reporters on Wednesday, said the dissenting votes in part reflected a very active debate among policymakers.

"I asked for a good family fight, and I got one. That's the purpose, that's the design feature," the new ‌Fed chief said. But he added ‌that there was "large majority support for the decision that we made in the room."