By Howard Schneider
CLEVELAND, Oct 12 (Reuters) - Cleveland Federal Reserve President Beth Hammack said on Monday she hopes the Fed can lower inflation without damaging the job market, but that may entail cooling the blistering pace of corporate investment or the market-driven wealth gains fueling personal consumption.
Those are the factors driving demand and helping sustain inflation that seems lodged in the 2.5%-to-3.0% range, Hammack said in a Reuters interview. They could perhaps be cooled enough
by restrictive monetary policy for inflation to decline without unemployment rising beyond the current 4.2% jobless rate, she said.
"I hear more that the economy is booming than I hear that people are looking to pull back," Hammack said, recounting conversations with business leaders. "I like growth...I'm not trying to stop growth. I'm just trying to pull it back a little bit so that it's moving at a pace that doesn't put too much pricing pressure out there."
"If we can curb it on the capex side, then maybe it doesn't have to hit as much on the consumption side," Hammack said. "I don't know precisely which one gets hit...Just seeing some amount of pullback in activity on either side would be beneficial."
Hammack said she feels interest rates need to move higher to restrain demand, but added she would go to the Fed's October 27-28 meeting with an "open mind," specifically about whether the Fed should lift rates then after September's hike. She is a voter on rate policy this year and dissented in July in favor of a rate hike. Investors currently expect the Fed to stay on hold in October.
"I think we need to put more restriction in the economy. But over what period of time, it's an open question to me," Hammack said.
Still, her comments are among the most explicit from a Fed official about the need to cool demand through restrictive monetary policy.
"We're only being challenged on one side of the mandate," with inflation high but the labor market stable around full employment, Hammack said.
"So my focus right now is going to be to try to get some attention" on inflation and "do it in a...deliberate fashion so that we don't weaken the labor market if we don't need to."
Consumer spending "does seem like it's being held up largely by the top end of the income spectrum and by the wealth effect," she said. "I think it is both the consumption side and I think it's the investment side. Both of those are driving the economy right now."
Policymakers have in the past seen a tradeoff between inflation and unemployment, with higher joblessness representing economic "slack" that eases demand, and thus price pressures.
INFLATIONARY PSYCHOLOGY
Since the COVID-19 pandemic, however, policymakers have offered differing ideas about how to meet their inflation target while maintaining full employment.
Some have argued monetary policy could work through an expectations channel, anchoring inflation expectations so that businesses and households restrain their own price and wage demands.
Hammack, though, said she is worried an inflationary psychology already may be taking root among firms competing for resources in an environment where investment by artificial intelligence hyperscalers has become relentless, making cost no object.
Because those firms are also doing well and are eager to invest, she sees executives planning for inflation to remain high and anticipating price increases greater than the pace at which their input costs are rising.
If those investment demands could be trimmed, it could help temper inflation without layoffs, she said.
"It may have started with the data centers, but I think it's starting to impact things more broadly. And so I want to just pull back a little bit of that," Hammack said.
"I have one blunt instrument to use...and I feel like I'm supposed to use that. I want to use it judiciously. I want to make sure that I'm using it in the right amount, at the right speed. But I think we need to put more restraint in the economy."
(Reporting by Howard Schneider; Editing by Dan Burns and Cynthia Osterman)
