Fed's Beth Hammack says rate cuts may prolong inflation, boost risks

Federal Reserve Bank of Cleveland President Beth Hammack said lowering interest rates to support the labour market could extend the period of above-target inflation and increase financial stability risks. Recent stock market gains and easy credit conditions add to the danger by encouraging investors to take more risk, Hammack said on Thursday (November 20) in remarks prepared for a conference hosted by the Cleveland Fed.

"Lowering interest rates to support the labour market risks prolonging this period of elevated inflation, and it could also encourage risk-taking in financial markets,” Hammack said Thursday. “This means that whenever the next downturn comes, it could be larger than it otherwise would have been, with a larger impact on the economy.”

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Investors have lowered their expectations for an additional interest rate cut in December after recent comments from policymakers displayed a deep divide among officials over how to proceed. Minutes of the Fed's October gathering showed many officials favoured keeping interest rates unchanged for the rest of the year. However, "several participants" said it may still be appropriate to cut borrowing costs when the Fed meets December 9-10.

Hammack has previously said she believes officials should keep putting downward pressure on inflation to bring it back to the central bank’s 2% target. She’s said she did not support the October rate reduction and sees little reason to cut in December.