Federal Reserve official Beth Hammack said the Fed should consider adjusting rates in smaller and more frequent steps rather than waiting for inflationary pressures to build up before acting more aggressively, in order to prevent high inflation from becoming entrenched in the economy. She believes U.S. inflationary pressures are no longer confined to energy prices, with higher tariffs and demand from artificial intelligence infrastructure buildout also pushing up costs, making it necessary to maintain restrictive monetary policy.

Hammack is the president of the Federal Reserve Bank of Cleveland and a voting member of the FOMC this year. She spoke on Monday at the National Association for Business Economics annual meeting in Cleveland, Ohio, focusing on monetary policy communication while laying out her views on inflation and interest rate policy. She did not explicitly argue that the Fed must raise rates at its October meeting, but stressed that monetary policy needs to remain sufficiently restrictive to bring inflation back to the 2% target in a timely manner.

Hammack said: "When conditions allow, I generally believe that smaller adjustments taken relatively quickly are preferable to waiting and risking the need for larger corrections later." Her remarks underscore her concern about persistent inflationary pressures and her preference for timely, gradual policy adjustments to control inflation, rather than waiting for a long time and then being forced into more aggressive action.

Inflationary pressures have spread beyond energy, with AI investment and tariffs pushing up costs

Hammack believes U.S. inflationary pressures are broad-based rather than concentrated in a single price category. Beyond rising energy prices, the cost shock from tariffs and strong demand driven by artificial intelligence infrastructure buildout are making it harder to bring inflation under control.

She noted that businesses are facing cost shocks from multiple rounds of tariff increases. Although a single tariff hike may in theory only cause a one-time increase in the price level, repeated tariff increases could subject businesses to recurring cost shocks, prompting them to pass on higher costs to consumers.

At the same time, AI infrastructure buildout is driving up demand and prices for computers, electronics, and other high-tech components. These costs affect not only data center projects but may also spill over into industries that use similar components, such as aviation, power production, and construction.

Hammack warned that inflation persistently above target could gradually foster entrenched inflation thinking, leading businesses and consumers to view higher inflation as normal. She said this risk is rising as high inflation persists.

In her view, current policy needs to be sufficiently restrictive on the economy to ensure inflation returns to the Fed's 2% target in a timely manner. Even with further tightening, it will take time for inflation to come down, so the risk of prolonged elevated inflation should not be underestimated.

Favoring timely small adjustments, but not explicitly backing an October rate hike

Hammack's remarks sent a hawkish policy signal, but they do not amount to an explicit call for the Fed to raise rates again this month.

The Fed had already raised rates at its September meeting to address resurgent inflationary pressures. Faced with multiple factors including rising energy prices, tariff costs, and AI-related investment demand, policymakers need to judge whether existing rates are restrictive enough to curb demand, and the timing and magnitude of any further tightening.

Hammack's position is that if economic and inflation data indicate action is needed, making smaller adjustments earlier could help avoid the need for larger policy corrections later. She stressed that monetary policy should respond to changing economic conditions, and that waiting itself should not be treated as a cost-free option.

She has also previously said that Fed officials can use upcoming economic data to further assess conditions before the next policy meeting on October 27-28. The latest U.S. inflation data will be one of the market's key focal points.

Investors have recently scaled back bets on a Fed rate hike in October. Several Fed officials, including the vice chair and the New York Fed president, have recently signaled a wait-and-see stance, suggesting there is no urgent need to raise rates at two consecutive policy meetings. However, Hammack's Monday remarks indicate that at least some officials remain concerned about persistent inflationary pressures and believe monetary policy needs to stay sufficiently tight.

Emphasizing policy transparency: explaining the reaction function is not a promise on the rate path

Beyond inflation and rate policy, another focus of Hammack's Monday speech was how the Fed should explain policy decisions to the public.

She believes policymakers have a responsibility to explain why they made specific decisions and which economic data, financial conditions, forecasts, and risks influence policy judgments. Helping consumers, businesses, and financial markets understand the Fed's decision-making logic can help them plan more effectively in an uncertain economic environment.

But Hammack also stressed that explaining the policy reaction function does not equal making a commitment about the future path of interest rates.

She said policymakers should be cautious about explicit forecasts of the rate path, because economic conditions constantly change and future policy choices must adjust accordingly. She specifically noted: "The reaction function is not forward guidance." If markets treat officials' explanations of their decision-making logic as commitments to future action, communication intended to enhance transparency could turn into mistaken market expectations about the policy path.

This stance also involves how the Fed balances transparency with policy flexibility. Hammack argues that officials should explain how they make judgments based on data and economic conditions, but should not let such explanations become fixed commitments about future rates.

Overall, Hammack's Monday remarks conveyed two messages: on one hand, she believes inflationary pressures have spread beyond energy, and tariff and AI investment demand have made inflation control more complex, requiring monetary policy to remain restrictive; on the other hand, she favors more timely small adjustments when necessary to reduce the risk of being forced into large corrections later. However, she did not explicitly call for a Fed rate hike in October in her speech, and the future policy direction will still depend on changes in inflation and other economic data.