Cleveland Fed President Hammack: “It’s reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be[...]

Cleveland Fed President Hammack: "It's reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be appropriate to act."

In a speech at the City Club of Cleveland, President Hammack talked about why the FOMC's inflation target is 2 percent, why it's important to get back to that level in a timely manner, and why it's critical to prevent an inflationary mindset

Federal Reserve Bank of Cleveland President and CEO Beth Hammack delivered a new speech, "It Takes Two to Make an Economy Go Right" at an event sponsored by the City Club of Cleveland, the Greater Cleveland Partnership, and the 50 Club of Cleveland in Cleveland, Ohio.

Key quotes

On monetary policy

• "Based on the data, I'm more concerned about the growing risks of persistently elevated inflation than the risks to full employment and that monetary policy may not be sufficiently restrictive to bring inflation down to 2%."
• "If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost."
• "It's reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be appropriate to act."

On inflationary mindset

• "Preventing an inflationary mindset is critical to delivering on our 2 percent objective. Increases in inflation expectations that threaten our goal warrant taking decisive action."

On the impact of FOMC communications on inflation

• "FOMC communications anchor inflation expectations, and these expectations affect the decisions that shape actual inflation outcomes-what you think will happen to prices matters."

From the speech

In reaction to the double-digit inflation of the 1970s and early 1980s, President Hammack described how central banks adopted inflation targeting-the practice of announcing a specific numerical goal for inflation and organizing policy around achieving it.

"The logic was straightforward: if the public knows where inflation is supposed to go, they can plan accordingly, hold the central bank accountable, and help keep inflation anchored through their own expectations," Hammack explained.

The 2 percent target isn't theoretical, but rather a foundation for businesses, consumers, and investors to make sound economic decisions. "Price stability is a key contributor to economic growth and maximum employment in the longer run," Hammack said.

Turning to monetary policy, Hammack noted that while the economy has been resilient so far, surging oil and gas prices could challenge both sides of the Fed's dual mandate.

Currently, Hammack said she sees the labor market as stable, with a 4.3 percent unemployment rate in April that is "right around my definition of full employment in the long term, when labor demand and labor supply are in balance."

Inflation, by contrast, Hammack said, is too high, moving higher, and continuing to impose costs on consumers.

Looking forward, Hammack said she is watching several factors, including the future path of oil prices and inflation; the resilience of spending; stabilization in employment; and evolving conditions in financial markets.

Hammack concluded by observing that since inflation has been elevated for six years, consumers, businesses, and financial markets may start to expect higher future inflation.

"Preventing an inflationary mindset is critical to delivering on our 2 percent objective. Increases in inflation expectations that threaten our goal warrant taking decisive action," Hammack said. "For today, it's reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be appropriate to act."

Read the full speech: It Takes Two to Make an Economy Go Right