Cleveland Fed's Hammack Lifts Fed Rate Hike Bets

Cleveland Fed's Beth Hammack backed smaller, faster rate moves, keeping a December Fed rate hike in play as futures price an October hold ahead of US CPI.

Lead

Cleveland Federal Reserve President Beth Hammack said on Monday that smaller, more frequent adjustments to policy are preferable to waiting and risking a larger correction. Her remarks strengthened expectations for another increase in the fed rate before year-end. Speaking at the National Association for Business Economics annual meeting in Cleveland, she stopped short of backing a move at the Oct. 27-28 meeting of the Federal Open Market Committee. The federal funds target range stands at 3.75%-4.00% after a unanimous 12-0 quarter-point increase on Sept. 16, the first hike since 2023.

What Did Hammack Say About Fed Rate Hikes?

Hammack said she favors acting early and in small steps. "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," she said.

She described inflation pressures as broad-based rather than confined to a single component of the economy. She also said a restrictive policy stance is appropriate to return inflation to the 2% target in a timely way. Persistently elevated inflation, she warned, risks entrenching an inflationary mindset among households and businesses.

Hammack is a voting member of the committee this year. She dissented at the July meeting in favor of a quarter-point increase, when the committee held rates in a 9-3 vote. Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan also dissented. She noted that officials will have more information, including a fresh consumer price reading, before they meet again.

Why Do Futures Still Price a December Hike?

Futures price a December hike because the committee's own projections point to one more increase and recent data have not argued against it. The September Summary of Economic Projections put the median year-end rate at 4.1%, a quarter point above the current range and up from 3.8% in June. Sixteen of 18 participants projected at least one additional increase.

Market pricing reflects that outlook:

• October 28: CME fed funds futures and prediction markets put a hold at roughly 82-84% and a quarter-point hike at 15-18%. A month ago, a hike was priced at around 71% on some venues.
• December 8-9: A quarter-point increase is priced at roughly 65-70%, with the probability of at least one hike before 2027 near 72%.

Energy has been a main driver. Oil reached $107 a barrel on Sept. 15, adding to headline price pressure. August payrolls rose by 162,000, well above the roughly 55,000 expected. The dollar index closed Friday at 101.9, its strongest level in six months, while the S&P 500, tracked by the SPY exchange-traded fund, sits near a record high.

What Does US CPI Mean for the Fed's Next Move?

September CPI is the last major inflation reading before the October decision and the last clean read before December. The Bureau of Labor Statistics releases it Wednesday at 8:30 a.m. ET.

Forecasts call for:

• Headline CPI up 0.6% on the month and 3.6-3.7% year on year, from 0.4% and 3.4% in August.
• Core CPI up 0.2% on the month and about 2.5% year on year, from 0.3% and 2.4%.

The expected split, with headline accelerating on energy while core cools, is the central test. A soft core print would support a December increase without forcing the committee's hand in October. A hotter core reading would raise the odds of an earlier move and of a larger cumulative tightening. Prediction markets already assign roughly a one-in-three chance to 50 basis points of total increases by year-end.

Market and Consumer Impact

Higher interest rates are feeding through to household borrowing costs. The Freddie Mac 30-year fixed mortgage rate averaged 6.95% in the week of the September decision, up from 6.76% the previous week. Deposit rates on high-yield savings accounts typically follow policy increases within weeks.

Outlook

The base case among futures traders is a hawkish hold on Oct. 28, with the door open to a December increase. Hammack's preference for small, early steps makes a series of quarter-point moves more likely than a single larger one. Wednesday's CPI report, then the October decision and the December meeting, will determine whether the target range ends the year at 4.00%-4.25%.