During a speech at the Economic Club of New York on Thursday, Beth Hammack, president of the Federal Reserve Bank of Cleveland, used a circus analogy to describe the Fed’s current balancing act of promoting both maximum employment and stable consumer prices.
“Determining the right lean is important,” Hammack said, conjuring images of an acrobat walking a tightrope, “but we also need to find the center.”
For central bankers, finding the center involves determining what constitutes “neutral” monetary policy, meaning a benchmark borrowing rate that neither stimulates nor restricts economic growth.
Once that center is ascertained, the Fed can choose to purposely lean toward fighting inflation or supporting the labor market through either a rate hike or a rate cut.
Other times, when both sides of the Fed’s dual mandate are in tension, the situation calls for holding rates steady to avoid falling off the tightrope to one side or the other due to economic crosswinds.
In October, the Fed’s rate-setting committee voted to cut the federal funds rate by 25 basis points, prioritizing the employment side of the mandate by making monetary policy less restrictive.
“After last week’s meeting, I see monetary policy as barely restrictive, if at all,” Hammack said, “and it’s not obvious to me that monetary policy should do more at this time.”
While she stopped short of calling for a rate hike, she said policy “should be mildly restrictive to return to our 2% inflation objective in a timely fashion while limiting the misses from maximum employment.”
Hammack won’t cycle onto one of the rotating seats on the Federal Open Market Committee (FOMC) until 2026, meaning she doesn’t have a policy vote at the Fed’s upcoming meeting in December.
But one FOMC member who will cast a vote next month — Austan Goolsbee, president of the Federal Reserve Bank of Chicago — suggested during a CNBC interview Thursday that he may take a cautious approach to future easing, as inflationary pressures may be slower to develop than labor market deterioration if the Fed chooses the wrong rate path.
“So that makes me even more uneasy, maybe I’d say, with front-loading rate cuts and counting on the inflation that we have seen in the last three months to just be transitory,” Goolsbee commented.
The Chicago Fed president said that over the medium term, he’s “not hawkish on rates,” meaning a strategy of raising interest rates to combat inflation. But he also channeled an analogy used by Fed Chair Jerome Powell after the October meeting, when Powell likened setting monetary policy during the ongoing federal government shutdown to “driving in the fog.”
“When it’s foggy, let’s just be a little careful and slow down,” Goolsbee said.
