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By Michael S. Derby<\/p>\n
NEW YORK, March 6 (Reuters) – Federal Reserve Bank of Cleveland President Beth Hammack said on Friday that while she expects inflation pressures to moderate, if they are not easing later this year the U.S. central bank may have to weigh tighter monetary policy to ensure price pressures retreat to 2%.<\/p>\n
\u201cMy \u200cexpectation has been that inflation would start making progress towards our 2% target. I don’t think we’ll get there by the end of this year by any \u200cstretch, but I think we’ll make some decent progress,\u201d Hammack said in an interview with Reuters.<\/p>\n
Given the current outlook, “rates should be on hold for \u2026quite some time,\u201d Hammack said. But she added that if price pressures do not retreat, the \u200bFed might need to take renewed action to ensure that they will.<\/p>\n
\u201cIf inflation is not making progress towards our goal in the latter half of this year, as I expect that it should, that might be a reason why we might need to be more restrictive from policy perspective,\u201d Hammack said.<\/p>\n
The bank president said it is possible but not assured that inflation will ease to the 2% target by 2027, but it does not need to be at the goal to support easier policy. Instead, the Fed can cut rates if there is strong confidence that inflation is on track to \u200chit the goal.<\/p>\n
Hammack said it was unclear so far what surging oil \u2060prices tied to President Donald Trump\u2019s war on Iran mean for future inflation.<\/p>\n
It is \u201ctoo early to know\u201d how all this will play out, Hammack said. When it comes to the oil shock, \u201cI try to look at what’s the magnitude and what’s the persistence? So, is this something that lasts \u2060for a week? Does it last for two months? Depending on what you know, what that time frame is, (that) will determine some more of the underlying economic impact,\u201d she said.<\/p>\n
The official said it is possible that an extended shock will both drive up inflation and depress factors like growth and hiring, and the Fed will have to evaluate those circumstances before deciding on a policy response.<\/p>\n
FED FACES CONFLICTING PRESSURES<\/p>\n
Hammack was interviewed \u200bon \u200bthe same day that the government released economic data that showed that the U.S. economy lost 92,000 jobs \u200bin February amid a small rise in the unemployment rate to 4.4%. \u200cThe negative turn on hiring bolstered fears of labor market vulnerability and came as Trump\u2019s war has caused energy prices to surge amid substantial disruptions in global supplies.<\/p>\n
Those two factors potentially put the Fed in a bind. Large-scale gasoline price increases risk pushing up already-high levels of inflation that are in turn already elevated by Trump\u2019s campaign of large-scale tax increases on imports. They also risk unmooring the public\u2019s expectation of future inflation and point to the potential need for the Fed to keep interest rates on hold for longer, or even to weigh a rate hike.<\/p>\n<\/p><\/div>\n
But on the other side, a sputtering job market could agitate for a rate cut. The Fed lowered its interest rate target by three-quarters of a percentage point to between 3.5% and \u200c3.75% last year to help support the job market, even with inflation overshooting the 2% target.<\/p>\n
The Fed next \u200bmeets March 17-18 and is widely expected to hold interest rates steady. Hammack is a voting member of \u200bthe rate-setting Federal Open Market Committee this year.<\/p>\n
Hammack said in the interview that the jobs \u200bdata shows signs of stabilizing and that she most closely tracks the unemployment rate right now amid uncertainty surrounding the factors now at play \u200cwith the payroll number.<\/p>\n
Hammack said she did not see any major systemic issues \u200bin financial markets but added that private credit \u200btroubles were on her radar and that developments there could bring some pain to investors.<\/p>\n
She also defended the current banking regulatory system used by the Fed as the institution is weighing changes that could lead to lighter oversight of the financial system.<\/p>\n
\u201cI believe that the system has been made safer by a number of the regulations that were \u200bput in place\u201d after the great financial crisis, Hammack said. She \u200cnoted those rules aided the successful navigation of the COVID-19 pandemic by banks, which were \u201cable to be a source of strength and a source of lending into \u200bthe real economy\u201d during those troubles.<\/p>\n
\u201cI think it’s important that we maintain that level of support,\u201d Hammack said, adding it was still possible that certain areas \u200bmight be tweaked or changed.<\/p>\n
(Reporting by Michael S. Derby in New York; Editing by Matthew Lewis)<\/p>\n<\/p><\/div>\n