Fed's Hammack says policy is not restrictive enough, favors smaller and quicker rate hikes

Cleveland Federal Reserve President Beth Hammack said Monday that current policy is not restrictive enough and that more tightening is needed to bring inflation back to the Fed's 2% goal. "A restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation," Hammack, a voting member of the Fed's policymaking committee, said in prepared remarks to the National Association of Business Economics. She said the question now is how fast to make policy more restrictive, and that the Fed needs to "cool the economy at the margins" without threatening the jobs side of its mandate.

On pace, Hammack favors incremental moves. "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. In a Barron's interview she said she favors smaller, more frequent hikes but remains open on the timing of the next one, and she described Treasury yields as "modest" by historic standards despite their recent rise.

Her main concern is expectations. Long-run inflation expectations have "stayed remarkably well anchored despite actual inflation being above target for more than five years," she said, "but I'm not taking that for granted". She said she is hearing "early warning signs" of a possible problem with expectations and sees firms passing higher input costs on to customers. The personal consumption expenditures price index rose 3.4% year over year in August, with the core reading at 3%.

The remarks follow the Fed's September vote to raise rates for the first time in three years, and minutes from that meeting signaled officials could vote to raise rates again without indicating when. Traders priced a more than 78% chance that rates are left unchanged at this month's meeting and a nearly 88% chance of a hike at the December meeting, according to CME's FedWatch tool. What to watch: the next inflation readings, and whether other voting members echo Hammack's case for moving sooner in smaller steps.