Three Fed dissenters say rate hikes are needed to combat inflation threat
The Federal Reserve voted Wednesday to leave interest rates unchanged. Three officials who dissented warned that delaying the fight against inflation could force the central bank to adopt more aggressive policies later. Cleveland Fed President Beth Hammack said in a statement Friday, “The longer inflation persists, the more difficult and costly it will be to bring inflation back to target.” Minneapolis Fed President Neel Kashkari said in a separate statement that, to guard against the risk of inflation becoming entrenched, he “would lean toward gradually tightening monetary policy as we continue to receive inflation and employment data.” Dallas Fed President Lorie Logan said later Friday, “Taking moderate action in the near term can reduce the likelihood that we will need to tighten policy forcefully in the future.” Fed officials voted 9-3 this week to keep the benchmark interest rate unchanged for a fifth consecutive meeting. The policy-rate range has remained at 3.5%-3.75% throughout the year. But as renewed tensions in the Middle East and an artificial-intelligence-driven investment boom again fuel inflation pressures, a growing number of officials have signaled support for raising rates. After remarks from Hammack, Kashkari and Logan, Treasuries sold off and oil prices rose. Two- to five-year Treasury yields gave back much of their decline following Wednesday’s Fed decision. The 10-year Treasury yield rose above 4.73% for the first time since January 2025, while the 30-year yield climbed above 5.25% to a new high since 2007. The market move began with a selloff in short-term bonds, which are highly sensitive to expectations for Fed policy, before spreading to longer-dated bonds, which are more affected by long-term inflation expectations. Monty Gandhi, a rates strategist at Global Capital Markets, said investors believe inflation has remained elevated for a long time and therefore require long-term bonds to offer a higher risk premium. The cost to bond traders of hedging against a further rise in long-term yields reached its highest level since March. St. Louis Fed President Alberto Musalem said the Treasury selloff showed that the Fed must raise rates to maintain the credibility of its policy. Musalem does not currently have a vote on the Federal Open Market Committee. He said “the market has spoken through its actions” and that he personally favored a 25-basis-point rate increase this week. All three dissenting officials said they had supported beginning to raise rates this week. Their statements cited several supply shocks that were pushing up inflation. Hammack added that inflationary pressure also existed on the demand side of the economy. Kashkari said the Fed’s policy tools could address inflation caused by “a series of supply shocks,” pointing to the late 1970s and early 1980s as a precedent. Logan said that even after accounting for supply shocks and productivity gains, inflation appeared likely to fall only to the middle of the range above 2%, rather than reaching the Fed’s 2% inflation target. She said labor-market conditions, household spending and financial-market conditions indicated that current policy was not restraining the economy. Without action from the Fed, she said, price pressures would be unlikely to fully dissipate. The three officials agreed that the broader economy remains strong. Data released Thursday showed that the Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, fell 0.1% from the previous month in June. Another inflation measure released earlier this month also declined, mainly because gasoline prices fell sharply. Economists warned, however, that an escalation in the Iran conflict in July pushed oil prices higher again, meaning the easing in inflation seen earlier this summer could prove short-lived. Hammack said current policy was not restrictive enough to curb price increases and could not ensure that inflation would automatically return to the 2% target. “The Federal Open Market Committee should act now to accelerate the return of PCE inflation to the 2% target and fulfill its commitment to price stability and serving the American public,” she said. At the Fed’s April policy meeting, the same three regional Fed presidents also dissented. At that time, they supported leaving rates unchanged but objected to language in the post-meeting statement suggesting that the next policy adjustment would probably be a rate cut. In an interview at the end of June, Kashkari said broad-based inflation pressures meant the Fed would probably need to raise rates during the year. At the previous month’s policy meeting, he joined eight other officials in projecting at least one rate increase this year. On Friday, he said small, gradual policy adjustments would give the Fed more room to respond to changes in economic conditions. “In my view, if inflation remains high, making several small tightening moves would be preferable to waiting for a long time and ultimately being forced to raise rates sharply,” Kashkari said. “If inflation cools, the Fed can slow or pause subsequent rate increases.” The three Fed presidents also said inflation had been above target for more than five years. Logan warned, “For every additional month that inflation remains above target, the financial burden on American households and businesses becomes heavier.” Markets had broadly expected the Fed to leave rates unchanged at its July 28-29 policy meeting. But Treasuries sold off after Wednesday’s decision, with the 30-year yield rising to a 19-year high. Fed Chair Kevin Warsh did not explain the reasoning behind the officials’ decision or provide guidance on the conditions needed for a rate adjustment. Richmond Fed President Tom Barkin said Friday that it was difficult to determine whether the current level of the benchmark interest rate was high enough to bring down inflation. Barkin will gain a vote on the FOMC next year. He said there was a case for reversing some of last year’s rate cuts, but he was unsure whether he would have joined the other three officials in dissenting this week. “Do we need to tighten further? That is the central question right now,” he said. Data released Friday showed that U.S. labor-cost growth remained steady in the second quarter, suggesting that the labor market was not adding further inflation pressure for now. Tony Fallon, managing director of rates trading at Mischler Financial Group, said, “Although the differences in the data are not large, the market needs inflation to continue falling, not to rebound slightly.”
Cleveland Fed President Beth Hammack said in a statement Friday, “The longer inflation persists, the more difficult and costly it will be to bring inflation back to target.”
Minneapolis Fed President Neel Kashkari said in a separate statement that, to guard against the risk of inflation becoming entrenched, he “would lean toward gradually tightening monetary policy as we continue to receive inflation and employment data.”
Dallas Fed President Lorie Logan said later Friday, “Taking moderate action in the near term can reduce the likelihood that we will need to tighten policy forcefully in the future.”
Fed officials voted 9-3 this week to keep the benchmark interest rate unchanged for a fifth consecutive meeting. The policy-rate range has remained at 3.5%-3.75% throughout the year. But as renewed tensions in the Middle East and an artificial-intelligence-driven investment boom again fuel inflation pressures, a growing number of officials have signaled support for raising rates.
After remarks from Hammack, Kashkari and Logan, Treasuries sold off and oil prices rose.
Two- to five-year Treasury yields gave back much of their decline following Wednesday’s Fed decision. The 10-year Treasury yield rose above 4.73% for the first time since January 2025, while the 30-year yield climbed above 5.25% to a new high since 2007.
The market move began with a selloff in short-term bonds, which are highly sensitive to expectations for Fed policy, before spreading to longer-dated bonds, which are more affected by long-term inflation expectations.
Monty Gandhi, a rates strategist at Global Capital Markets, said investors believe inflation has remained elevated for a long time and therefore require long-term bonds to offer a higher risk premium.
The cost to bond traders of hedging against a further rise in long-term yields reached its highest level since March.
St. Louis Fed President Alberto Musalem said the Treasury selloff showed that the Fed must raise rates to maintain the credibility of its policy. Musalem does not currently have a vote on the Federal Open Market Committee. He said “the market has spoken through its actions” and that he personally favored a 25-basis-point rate increase this week.
All three dissenting officials said they had supported beginning to raise rates this week. Their statements cited several supply shocks that were pushing up inflation. Hammack added that inflationary pressure also existed on the demand side of the economy. Kashkari said the Fed’s policy tools could address inflation caused by “a series of supply shocks,” pointing to the late 1970s and early 1980s as a precedent.
Logan said that even after accounting for supply shocks and productivity gains, inflation appeared likely to fall only to the middle of the range above 2%, rather than reaching the Fed’s 2% inflation target. She said labor-market conditions, household spending and financial-market conditions indicated that current policy was not restraining the economy. Without action from the Fed, she said, price pressures would be unlikely to fully dissipate.
The three officials agreed that the broader economy remains strong.
Data released Thursday showed that the Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, fell 0.1% from the previous month in June. Another inflation measure released earlier this month also declined, mainly because gasoline prices fell sharply. Economists warned, however, that an escalation in the Iran conflict in July pushed oil prices higher again, meaning the easing in inflation seen earlier this summer could prove short-lived.
Hammack said current policy was not restrictive enough to curb price increases and could not ensure that inflation would automatically return to the 2% target.
“The Federal Open Market Committee should act now to accelerate the return of PCE inflation to the 2% target and fulfill its commitment to price stability and serving the American public,” she said.
At the Fed’s April policy meeting, the same three regional Fed presidents also dissented. At that time, they supported leaving rates unchanged but objected to language in the post-meeting statement suggesting that the next policy adjustment would probably be a rate cut.
In an interview at the end of June, Kashkari said broad-based inflation pressures meant the Fed would probably need to raise rates during the year. At the previous month’s policy meeting, he joined eight other officials in projecting at least one rate increase this year.
On Friday, he said small, gradual policy adjustments would give the Fed more room to respond to changes in economic conditions.
“In my view, if inflation remains high, making several small tightening moves would be preferable to waiting for a long time and ultimately being forced to raise rates sharply,” Kashkari said. “If inflation cools, the Fed can slow or pause subsequent rate increases.”
The three Fed presidents also said inflation had been above target for more than five years. Logan warned, “For every additional month that inflation remains above target, the financial burden on American households and businesses becomes heavier.”
Markets had broadly expected the Fed to leave rates unchanged at its July 28-29 policy meeting. But Treasuries sold off after Wednesday’s decision, with the 30-year yield rising to a 19-year high. Fed Chair Kevin Warsh did not explain the reasoning behind the officials’ decision or provide guidance on the conditions needed for a rate adjustment.
Richmond Fed President Tom Barkin said Friday that it was difficult to determine whether the current level of the benchmark interest rate was high enough to bring down inflation.
Barkin will gain a vote on the FOMC next year. He said there was a case for reversing some of last year’s rate cuts, but he was unsure whether he would have joined the other three officials in dissenting this week. “Do we need to tighten further? That is the central question right now,” he said.
Data released Friday showed that U.S. labor-cost growth remained steady in the second quarter, suggesting that the labor market was not adding further inflation pressure for now.
Tony Fallon, managing director of rates trading at Mischler Financial Group, said, “Although the differences in the data are not large, the market needs inflation to continue falling, not to rebound slightly.”