WRAPUP 2-Three Fed dissenters say rate hike is needed to curb inflation

Three Federal Reserve officials, including Cleveland Fed President Beth Hammack and Minneapolis Fed President Neel Kashkari, called for immediate interest rate hikes to combat stubborn inflation above the 2% target.

Three Federal Reserve officials who dissented at this week's policy meeting in favor of an interest rate hike called on Friday for immediate action 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 central bank's policy-setting Federal Open Market Committee 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. Dallas Fed President Lorie Logan, the third policymaker to support raising the central bank's benchmark interest rate by a quarter of a percentage point from its current 3.50%-3.75% range this week, also said she feels current monetary policy isn't putting any downward pressure on inflation.

"Without any policy restraint, inflation will likely continue to trend above target until there's an unanticipated shock," Logan said in a ⁠separate statement. "The FOMC ​cannot count on unanticipated shocks to achieve its goals and can always adjust ⁠policy if unanticipated shocks occur." Raising rates by a "modest" amount "in the near term could reduce the likelihood of needing to take sharper action later," she said. The FOMC voted 9-3 on Wednesday in favor of holding rates steady.

STICKY INFLATION U.S. President Donald Trump picked Kevin Warsh with the express intent to loosen monetary policy that Trump says is ⁠needed to ease the government's debt burden and boost the economy. Policy dissents from a quarter of the voting members of the FOMC show Warsh is increasingly backed into a corner over whether to continue to resist those pushing for tighter policy or to disappoint Trump. Warsh has provided no insight into his ​own monetary policy outlook, and financial markets had priced in the possibility of a rate hike on Wednesday. The gauge by which the Fed measures progress toward its 2% goal — the Personal Consumption Expenditures Price Index — rose 3.7% on a year-over-year ⁠basis in June and continues to face upward pressure. The Fed's decision this week to leave rates unchanged and a hint from Warsh that the central bank may look to change its inflation goalposts helped send 30-year Treasury yields above 5.2%, a 19-year high. They extended their rise on Thursday and Friday in a move widely seen as expressing doubts ⁠about ​the Fed's inflation-fighting credibility. Short-term Treasuries and interest-rate futures also reflected falling confidence that the central bank will raise rates at its September 15-16 meeting. 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 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, since its policymakers would traditionally hold off on any action in such situations.

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."