Fed's Beth Hammack and Thomas Barkin favour gradual rate hikes as inflation stays high

Beth Hammack and Thomas Barkin both supported a gradual approach to future US interest-rate increases. Their comments came as inflation remained too high and policymakers faced uncertainty from geopolitics, elections and AI investment. The goal is still to bring inflation back to 2% without creating unnecessary economic damage.

Hammack said smaller, more frequent adjustments would be less disruptive to households, businesses and financial markets than sharp increases. She also warned that gradual action could help prevent an “inflationary mindset,” in which people begin expecting prices to keep rising. Barkin similarly said inflation was holding firm rather than easing, but that gradual increases made sense.

The Fed had just held its benchmark rate at 3.75%-4.00%, although Hammack and Lisa Cook voted for an increase. Markets broadly expected another December hike, but the probability had fallen to about 70%. Further increases remained less certain.

When the Federal Reserve moves monetary policy into a restrictive stance, it raises borrowing costs to slow demand across the economy. The purpose is to reduce pressure on prices and bring inflation down. The article links this stance directly to Hammack’s goal of returning inflation to 2% in a timely manner.

In practice, restrictive policy makes loans, credit and investment more expensive. Households may delay purchases, while businesses may postpone expansion or equipment spending. These changes can reduce demand for goods and services. The article does not define a precise rate that counts as restrictive, so the exact level depends on economic conditions.

The Fed had held its benchmark rate at 3.75%-4.00%, while Hammack and Lisa Cook supported an increase. Policymakers still faced inflation that was too high. However, gradual increases remained preferred because they could restrain prices without causing a sharp shock to households, companies or markets.

The Federal Reserve’s benchmark interest-rate range was 3.75% to 4.00% when the article was published. Its inflation objective was 2%. These figures describe different things: the first is the cost of benchmark borrowing, while the second is the desired annual inflation rate. Comparing them shows the policy rate was well above the inflation target.

The lower end of the range, 3.75%, was 1.75 percentage points above 2%. The upper end, 4.00%, was twice the target’s numerical percentage. That does not mean interest rates directly measure inflation, but it illustrates how strongly the Fed was using interest rates to address persistent price increases.

The Fed had kept rates unchanged at that meeting. Hammack and Lisa Cook voted for an increase, revealing disagreement over policy intensity. Financial markets broadly expected another increase in December, though expectations beyond December were more uncertain and the estimated probability had fallen to around 70%.

Smaller, more frequent rate increases can reduce the risk of a sudden economic shock. Households have more time to adjust budgets, businesses can reassess spending plans, and investors can update expectations gradually. Hammack said this approach would be less disruptive to households, businesses and financial markets than sharp increases.

For example, a large one-time hike could quickly raise borrowing costs for mortgages, business loans and other credit. Families might cut spending abruptly, while companies could cancel projects or reduce hiring. Financial markets might also react sharply as investors revise the value of assets. Smaller moves spread the adjustment over time, making the change easier to absorb.

The article presents gradual increases as a way to fight inflation while limiting disruption. Hammack also said they could prevent an “inflationary mindset” from taking hold. Barkin agreed that gradual increases made sense, although both officials believed inflation remained too high.

Higher interest rates reduce inflation mainly by slowing borrowing and demand. When loans and credit become more expensive, households may postpone purchases and businesses may delay expansion. Lower spending reduces competition for goods and services. That can ease pressure on prices over time. This general mechanism is established economic knowledge; the article focuses on the Fed’s need to use restrictive policy.

For example, a company facing higher financing costs might postpone buying equipment or building a facility. A household might delay a large purchase because loan repayments are more expensive. With less spending and investment, demand for workers, materials and products can cool. Businesses may then have less ability to raise prices quickly.

The article says inflation remained too high and was holding firm. The Fed had kept rates at 3.75%-4.00%, while Hammack and Cook favoured an increase. Officials preferred gradual moves because they wanted to reduce inflation without sharply disrupting households, companies or markets.

Federal Reserve policymakers are divided because they face two competing risks. Inflation remains too high, so rates may need to rise further. But aggressive increases can weaken household spending, business activity and financial markets. Policymakers therefore disagree over how quickly restrictive policy should be applied.

The article gives a clear example. Hammack and Lisa Cook voted for a rate increase when the Fed kept its benchmark rate at 3.75%-4.00%. Hammack still favours smaller and more frequent adjustments rather than sharp increases. Barkin also said inflation was holding firm, yet argued that gradual increases made sense. Their positions show concern about inflation alongside concern about disruption.

Markets broadly expected another increase in December, but expectations beyond that were uncertain. Futures traders lowered the estimated probability of a December hike to about 70%. Future decisions could also be shaped by jobs data, geopolitical developments and the pace of AI investment.

A slowdown in AI infrastructure investment could ease inflationary pressure by reducing demand for equipment and related resources. The article says local opposition to data centres and permitting challenges could slow spending. If fewer projects move ahead, suppliers may face less pressure, helping demand and supply remain more balanced.

The mechanism is straightforward. Rapid construction and investment can increase demand for equipment, materials and other resources. If AI capital expenditure slows, that demand growth weakens. Evercore ISI analysts said this could help maintain balance without requiring many more rate increases. Slower investment would therefore complement monetary policy by cooling demand outside interest-rate decisions.

The outlook remained uncertain. Evercore expected AI capital expenditure could slow over the next year or two. TD Securities projected another 50 basis points of Fed increases by early next year, but said a slowdown in AI investment could reduce the need for further tightening after March. The Iran war’s resolution could have a similar effect.