Higher rates could be needed to avoid 'inflationary mindset' taking hold, says Fed's Hammack

Cleveland Federal Reserve President Beth Hammack said Monday that tighter monetary policy might be needed to bring down inflation and the central bank should make fast, incremental adjustments.

"When feasible, I generally think it's preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction," Hammack, a voting member of the Fed's policymaking committee, said in prepared remarks delivered during the National Association of Business Economics annual gathering.

"Considering all the inputs that factor into my reaction function, a restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation," Hammack added.

Hammack's comments signal that more interest rate hikes could be on the horizon. Fed officials signaled in September meeting minutes that they could vote to raise rates again — but did not give a clear indication on when such a decision would come.

The Fed last month voted to increase interest rates for the first time in three years.

Traders priced in a more than 78% likelihood that the central bank keeps rates unchanged at its policy meeting later this month, according to CME's FedWatch tool. But they see a nearly 88% chance of a hike at the Fed's final meeting of the year in December.

Sticky inflation poses challenges for consumers, businesses and monetary policymakers alike, Hammack said. The Cleveland Fed chief said that, with the "breadth" of current inflationary pressures, she expects it will take "some time" to get annual price growth down to the central bank's goal of 2%.

The personal consumption expenditures price index came in at 3.4% year over year in August. The so-called core reading of the index, which strips out volatile food and energy costs and is favored by the Fed, registered at 3% compared with a year prior.

"Long-run inflation expectations have stayed remarkably well anchored despite actual inflation being above target for more than five years," Hammack said. "But I'm not taking that for granted."

"With each passing month, persistently elevated inflation raises the risks of an inflationary mindset becoming entrenched in the economy," she said.