During an interview with CNBC, Hammack said that if consumer spending continues to hold up, it would suggest that the policy is not restrictive enough to bring inflation under control.
- Hammack said that based on her conversations with businesses in her district, she observed that the AI data center buildout and other factors are contributing to the upward pressure on prices.
- She acknowledged that cooling crude oil prices have taken some steam off elevated inflation, but noted that it is just one aspect of the pricing pressures in the U.S. economy.
- Hammack also noted that the adverse impact of higher interest rates on the labor market is another key concern.
Federal Reserve Bank of Cleveland President Beth Hammack said Tuesday that interest rates may need to be raised to bring inflation back under control.
During an interview with CNBC, Hammack said that inflation has been elevated for the past five years. “We’ve got inflation that’s too high, and it’s been too high for the past five years. So when I look at policy, if that continues, it may mean that we may need higher interest rates to bring inflation back down to target,” she said during the interview.
Hammack added that the labor market is near her target of full employment and the U.S. economy’s growth numbers look healthy and stable.
Hammack Says AI Buildout Contributing To Pressure On Prices
Hammack said that based on her conversations with businesses in her district, she observed that the AI data center buildout and other factors are contributing to the upward pressure on prices.
“I also hear about pressures coming more broadly from the AI data center buildout. I’m hearing about pressure from insurance… I’m hearing about electricity pressures,” she added, while noting that the elevated inflation is more broad-based.
Hammack acknowledged that cooling crude oil prices have taken some steam off elevated inflation, but noted that it is just one aspect of the pricing pressures in the U.S. economy.
Meanwhile, the iShares 20+ Year Treasury Bond ETF (TLT) declined 0.46% at the time of writing, while the iShares 7-10 Year Treasury Bond ETF (IEF) fell 0.24%.
Impact On Labor Market Also A Key Factor, Says Hammack
Hammack added that a potential adverse impact of higher interest rates on the labor market is another key concern on her mind.
However, she noted that consumer spending has held up well, adding that the discretionary portion of this spending has remained constant despite gas prices soaring since the war in Iran.
“I want to watch that consumer data, and I want to see if it continues to hold up, and if it does, then that says to me that the policy may not be restrictive enough to help us bring inflation back down,” Hammack added.
According to the CME FedWatch tool, markets are pricing in a 66.3% probability that the Fed will leave interest rates unchanged in July. However, expectations shift in September, when the odds of a 25-basis-point rate hike rise to 50%, exceeding the probability that rates will remain unchanged for the rest of the year.
Fed’s Preferred Inflation Gauge At 31-Month High
The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, advanced 4.1% in May on an annualized basis, the highest level since October 2023.
Core PCE, which excludes food and energy, rose 3.4% on an annualized basis in April, up 0.3% on a monthly basis.
At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, gained 0.68%; the Invesco QQQ Trust ETF (QQQ) surged 1.44%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.14%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in ‘bearish’ territory.
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