Cleveland Fed President: Iran Tension Could Delay Interest Rate Drop

The Federal Reserve may need to keep interest rates steady for an extended period as new risks emerge from rising energy prices tied to tensions in the Middle East and inflation remains above target, according to Cleveland Federal Reserve Bank President Beth Hammack, a voting member of the central bank's rate-setting committee.

"We're in a good spot from a policy perspective," Hammack told The New York Times, the newspaper reported on Wednesday. "I think we could be on hold for quite some time."

“Inflation has exceeded the Federal Reserve's 2% annual target for roughly five years, and progress toward bringing it down has slowed over the past year amid sweeping tariffs implemented by President Donald Trump that reshaped global trade.

However, the labor market has shown signs of stabilizing, reinforcing Hammack's view that the central bank does not need to rush to cut borrowing costs after three quarter-point rate reductions last year.

The Fed is widely expected to keep rates unchanged at its March 17-18 meeting. The central bank lowered rates three times in the second half of last year to a range of 3.5% to 3.75%, despite supply disruptions linked to tariffs.

Hammack said escalating conflict in the Middle East and the potential for higher energy prices present a new inflation risk.

"There are two-sided risks to rates," Hammack said. "If we see more weakness emerging in the labor market, it could mean that we need to provide more accommodation. If we don't see inflation moving toward target as I expect, it could mean that we need to put more restrictions on the economy."

She described current policy as roughly "neutral," meaning interest rates are neither stimulating nor restraining economic activity.

"It's important to make sure that we're maintaining policy at a level where we can drive inflation back down to target while balancing any potential softness in the labor market," Hammack said.

Hammack previously signaled caution about easing policy.

At the Federal Open Market Committee's December 2024 meeting, she dissented from the panel's decision to cut rates by a quarter-point, citing strong economic conditions and concerns that inflation remained elevated.

Divisions among policymakers have grown since Trump returned to the White House and imposed tariffs that raised concerns about both higher inflation and slower growth.

Those disagreements could intensify when Kevin Warsh, Trump's pick to lead the Federal Reserve after Fed Chair Jerome Powell's term ends May 15, takes over.

Trump has been demanding substantially lower interest rates.

Hammack emphasized that the Fed chair holds only one vote on the committee.

"That person will have to convince at least six other members of the committee to vote alongside them if they want to do something," she said.

Warsh and others have suggested that productivity gains tied to artificial intelligence could give the Fed room to cut rates without fueling inflation.

Hammack said it is too early to rely on such forecasts when setting policy.

"I want to see evidence that we are making progress on the inflation side of our mandate to have more confidence in my forecast," Hammack said.

She said inflation could gradually ease through the summer but is likely to remain above the Fed's target beyond the end of the year. In December, the Fed's preferred inflation measure, the personal consumption expenditures price index, stood at 2.9%.

Hammack also urged caution in shrinking the Fed's $6.5 trillion balance sheet, saying policymakers should move carefully and communicate clearly with the public.

"We need to be very thoughtful. We need to be methodical. We need to signal to the public what it is that we're doing, where we think we're headed, and why," she said.

She also stressed the importance of preserving the Fed's independence as political pressure on the central bank increases.

"If we're lowering rates into a world where there's more persistent inflation, then inflation expectations are going to go up, investors are going to demand more compensation, and yields are going to go up in the back end of the curve," Hammack said.