Cleveland Fed's Hammack: restrictive stance needed, in smaller steps taken quickly

Serguey Asael Shinder13 October 2026, 06:542 min read

Beth Hammack, president of the Federal Reserve Bank of Cleveland, spoke on 12 October 2026 at the 68th annual meeting of the National Association for Business Economics in Cleveland. The speech, titled "Trimming the Sails: Communicating My Reaction Function", set out how she decides and where her inputs point now. She stressed that the views are her own.

Her conclusion. "A restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation." When feasible, she says, she prefers smaller adjustments made relatively quickly, rather than waiting and risking a larger correction.

Inflation. Headline PCE inflation was 3.4% in August and core 3%, both above year-earlier readings of 2.7% and 2.9%. Hammack calls the pressures broad-based: energy, multiple waves of tariff increases that act as a series of cost shocks rather than a one-time price-level change, and demand from the AI buildout raising prices of computer, electronic and high-tech components used well beyond data centres. Core services excluding housing are also showing pressure. Cleveland Fed estimates put trend inflation in the mid to high 2% range. She says she can look through one supply shock, but has "a much harder time looking through shocks that arrive one after another".

Expectations. Long-run expectations have stayed well anchored despite more than five years above target, but she is "beginning to hear" of an inflationary mindset: a District retailer plans to raise prices by more than its input costs have risen because it expects more inflation from somewhere.

Labour market and conditions. Unemployment of 4.2% has been steady since late last year and is close to her estimate of maximum employment; payroll growth has picked up, claims and WARN layoff notices are low, and she sees risks to the employment side leaning toward more tightness. With the recent rise in yields she sees financial conditions as neutral rather than restraining demand.

Reaction function, not a promise. Hammack drew "a sharp line": a reaction function describes how policy is likely to respond to conditions, while forward guidance is an explicit commitment, typically used at the effective lower bound. A convincing deterioration in the labour market would change the path; inflation above her forecast or an entrenched inflationary mindset could require rates higher still.

Source: Federal Reserve Bank of Cleveland, Beth M. Hammack, "Trimming the Sails: Communicating My Reaction Function" — https://www.clevelandfed.org/collections/speeches/2026/sp-20261012-trimming-the-sails-communicating-my-reaction-function