Fed's Hammack warns against further rate cuts, cites inflation risks

Investing.com -- Federal Reserve Bank of Cleveland President Beth Hammack cautioned Thursday that additional interest rate cuts could pose significant risks to the economy amid persistent inflation above the Fed’s 2% target.

"Lowering interest rates to support the labor market risks prolonging this period of elevated inflation, and it could also encourage risk-taking in financial markets," Hammack said in a speech at a conference hosted by her bank.

Hammack, who does not hold a vote on the Federal Open Market Committee (FOMC) this year, opposed the Fed’s decision to cut its federal funds target rate by a quarter percentage point in late October to between 3.75% and 4%.

She noted that financial conditions are "quite accommodative today" with rising stock prices and "easy" credit conditions. Making credit even cheaper "could support risky lending," she warned.

The Cleveland Fed president expressed concern that Fed-driven reductions in short-term borrowing costs might distort market pricing, which "means that whenever the next downturn comes, it could be larger than it otherwise would have been, with a larger impact on the economy."

While some view rate cuts as "taking out insurance" for the job market, Hammack cautioned that "such insurance could come at the cost of heightened financial stability risks."

Hammack has consistently maintained that monetary policy was barely positioned to restrain price pressures, emphasizing the importance of bringing inflation back to target.

In her speech, she stated that "the financial system is in good shape" with well-capitalized banks and solid household balance sheets, though she noted concerns about elevated leverage in hedge funds and insurers, adding that private credit and stablecoins warrant monitoring.

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