Fed’s Hammack: Insurance rate cut for jobs could backfire on financial stability

Cleveland Fed President Beth Hammack made it clear today that she sees significant risks in cutting interest rates further while inflation remains above target. Easing policy to cushion the labor market, she argued, risks “prolonging this period of elevated inflation” and could further fuel “risk-taking” in an already buoyant financial environment.

With stock prices firm and credit flowing freely, financial conditions are “quite accommodative,” she noted, making additional monetary support potentially counterproductive.

Hammack also warned that lowering short-term borrowing costs could distort asset pricing and credit risk signals. Such distortions, she said, might leave the economy exposed to a sharper downturn late.

She pushed back against the idea that a rate cut would act as “insurance” for the labor market, saying policymakers must recognize that such insurance could come “at the cost of heightened financial stability risks”.