Why Three Fed Dissenters Supported Raising Interest Rates
Cleveland Federal Reserve President Beth Hammack has been a staunch advocate of raising interest rates to contain inflation. This week, three Federal Reserve policymakers who voted against the central bank's decision said they feared inflation would become entrenched in the economy unless the Fed took more decisive action to control prices. The Fed voted 9-3 on Wednesday to keep its key interest rate unchanged, even as inflation remained near 4%, almost twice the central bank's 2% target. Inflation has been above the Fed's target for more than five years. The majority, led by newly appointed Fed Chair Kevin Warsh, wants to wait for more evidence to determine whether inflation will continue to ease. Prices fell in June for the first time since the 2020 pandemic, partly because of lower oil prices. The dissenters said they doubted inflation would slow to the Fed's 2% target without an interest-rate increase. Raising rates typically restrains economic growth and inflation. "Inflation has been stubbornly above 2% for more than five years, and I do not believe it will return to our target on its own," Hammack said. She was one of the three dissenters. The other two were Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan. The dissent marked the most opposition votes at the typically consensus-oriented Fed in a decade. None of the Fed's seven governors in Washington supported raising rates. The governors would first have to split before rate-hike supporters could gain a majority. Many Wall Street economists believe the Fed should raise rates to curb inflation and dispel market doubts about its commitment to achieving the 2% target. That view is not unanimous. Some economists say the labor market is showing signs of weakness, while the housing market remains depressed by high mortgage rates and elevated home prices, frustrating many would-be buyers. In addition, the recent rise in inflation has been driven mainly by the war with Iran and the resulting increase in oil prices. Tariffs imposed by President Donald Trump have also played a role. Economists describe such events as "shocks": They can be sudden and unpredictable, but they typically do not push inflation higher for an extended period. Economic theory generally advises the Fed not to respond when inflation rises because of such shocks, on the view that inflation will ease once the shocks fade. For example, raising interest rates would have little or no effect on oil prices. Most Fed officials are willing to wait and see whether the conflict with Iran is resolved. A resolution would lower oil prices and ease U.S. inflation. Kashkari questioned that approach. He said the U.S. experience with high inflation in the 1970s showed that a series of price-raising shocks could become entrenched over time as permanently high inflation. In a statement early Friday, Kashkari said: "Policymakers ultimately concluded that, despite the initial diagnosis of a supply shock, contractionary monetary policy was still needed to bring inflation down." Warsh has pledged that the Fed will defeat inflation and achieve its 2% target, but Wall Street investors are increasingly skeptical. They question whether he will support his hawkish rhetoric with interest-rate increases. Warsh was appointed by President Trump, who has made no secret of his desire for the Fed to cut rates. Warsh has insisted that he and the Fed will act independently and do everything they can to contain inflation. "You have heard this before, but we will achieve price stability," Warsh said after Wednesday's meeting, his second as Fed chair. The dissenters said the first step toward that goal should be to begin raising rates gradually. They argued that the economy and labor market were strong enough to support the strategy. "In my view, if inflation remains elevated, a series of small policy adjustments would be better than waiting and ultimately concluding that bolder action is needed," Kashkari said. "On the other hand, if inflation continues to recede, a strategy of small policy steps would allow the [Fed] to slow or pause subsequent adjustments without unnecessarily harming the real economy."
This week, three Federal Reserve policymakers who voted against the central bank's decision said they feared inflation would become entrenched in the economy unless the Fed took more decisive action to control prices.
The Fed voted 9-3 on Wednesday to keep its key interest rate unchanged, even as inflation remained near 4%, almost twice the central bank's 2% target. Inflation has been above the Fed's target for more than five years.
The majority, led by newly appointed Fed Chair Kevin Warsh, wants to wait for more evidence to determine whether inflation will continue to ease. Prices fell in June for the first time since the 2020 pandemic, partly because of lower oil prices.
The dissenters said they doubted inflation would slow to the Fed's 2% target without an interest-rate increase. Raising rates typically restrains economic growth and inflation.
"Inflation has been stubbornly above 2% for more than five years, and I do not believe it will return to our target on its own," Hammack said. She was one of the three dissenters. The other two were Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan. The dissent marked the most opposition votes at the typically consensus-oriented Fed in a decade.
None of the Fed's seven governors in Washington supported raising rates. The governors would first have to split before rate-hike supporters could gain a majority.
Many Wall Street economists believe the Fed should raise rates to curb inflation and dispel market doubts about its commitment to achieving the 2% target.
That view is not unanimous. Some economists say the labor market is showing signs of weakness, while the housing market remains depressed by high mortgage rates and elevated home prices, frustrating many would-be buyers.
In addition, the recent rise in inflation has been driven mainly by the war with Iran and the resulting increase in oil prices. Tariffs imposed by President Donald Trump have also played a role. Economists describe such events as "shocks": They can be sudden and unpredictable, but they typically do not push inflation higher for an extended period.
Economic theory generally advises the Fed not to respond when inflation rises because of such shocks, on the view that inflation will ease once the shocks fade. For example, raising interest rates would have little or no effect on oil prices.
Most Fed officials are willing to wait and see whether the conflict with Iran is resolved. A resolution would lower oil prices and ease U.S. inflation.
Kashkari questioned that approach. He said the U.S. experience with high inflation in the 1970s showed that a series of price-raising shocks could become entrenched over time as permanently high inflation.
In a statement early Friday, Kashkari said: "Policymakers ultimately concluded that, despite the initial diagnosis of a supply shock, contractionary monetary policy was still needed to bring inflation down."
Warsh has pledged that the Fed will defeat inflation and achieve its 2% target, but Wall Street investors are increasingly skeptical. They question whether he will support his hawkish rhetoric with interest-rate increases.
Warsh was appointed by President Trump, who has made no secret of his desire for the Fed to cut rates. Warsh has insisted that he and the Fed will act independently and do everything they can to contain inflation.
"You have heard this before, but we will achieve price stability," Warsh said after Wednesday's meeting, his second as Fed chair.
The dissenters said the first step toward that goal should be to begin raising rates gradually. They argued that the economy and labor market were strong enough to support the strategy.
"In my view, if inflation remains elevated, a series of small policy adjustments would be better than waiting and ultimately concluding that bolder action is needed," Kashkari said. "On the other hand, if inflation continues to recede, a strategy of small policy steps would allow the [Fed] to slow or pause subsequent adjustments without unnecessarily harming the real economy."