Fed officials Beth Hammack and Thomas Barkin both backed further interest rate increases on Thursday, favouring gradual tightening as inflation remains above the central bank’s 2% target. Speaking at an event in Zurich, Cleveland Fed President Hammack said, “I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner.” Richmond Fed President Barkin echoed that assessment, describing inflation as “the most important risk right now” and arguing that the direction of policy was relatively straightforward given the low unemployment rate and persistent price pressures.
Both officials favoured smaller adjustments, although their emphasis differed. Hammack preferred more frequent, modest increases to establish sufficiently restrictive policy without unnecessarily disrupting households, businesses and financial markets. She also warned against allowing an “inflationary mindset” to become entrenched. Barkin, meanwhile, suggested that current policy was close to neutral and potentially still somewhat accommodative, particularly given elevated consumption. He emphasized the value of responding to incoming information rather than committing to a fixed pace. “Gradual makes sense if you think there’s uncertainty in the world,” he said.
Barkin also highlighted AI investment as an important source of near-term inflation pressure, while acknowledging that the technology could eventually expand productive capacity and help moderate prices. He raised concerns about the substantial borrowing associated with AI infrastructure development, distinguishing financially strong hyperscalers from potentially less transparent risks among financial intermediaries. “You do wonder where in the intermediary sector is the biggest risk,” he said. His remarks come as the Democratic midterm victory has increased uncertainty over future data-center development, potentially affecting the pace of AI investment and its contribution to demand pressures. However, neither official explicitly linked the election outcome to a change in their policy outlook.
The Fed held its benchmark rate at 3.75–4.00% in October after raising rates in September. While another increase at the December 8–9 meeting remained the favoured market outcome, Reuters reported that its implied probability fell from more than 80% on Wednesday to around 70% on Thursday. The distinction is between officials’ continuing support for additional tightening and growing market uncertainty over how much may ultimately be required. Hammack and Barkin both see inflation warranting further restraint, but the evolving AI investment outlook and incoming economic data could influence the eventual extent of tightening. Friday’s US employment report will provide the next test of labor market conditions.
Key Takeaways
- Fed’s Hammack and Barkin support further rate hikes: Both officials argued that inflation remains too high and additional monetary restraint is needed to bring price pressures back toward the Fed’s 2% target.
- Gradual tightening is their preferred approach: Hammack favours smaller, more frequent adjustments to limit disruption, while Barkin believes gradual increases allow policymakers to respond to uncertainty and incoming economic data.
- Hammack wants monetary policy to become restrictive: The Cleveland Fed President warned against allowing an “inflationary mindset” to develop and argued that current monetary conditions have not provided sufficient restraint.
- Barkin sees current policy near neutral: The Richmond Fed President suggested that monetary policy may still be somewhat accommodative, particularly given elevated consumption, leaving room for further tightening.
- AI investment is contributing to near-term inflation pressure: Barkin acknowledged that the rapid expansion of AI infrastructure is boosting demand, although increased productive capacity could help moderate inflation over time.
- AI financing also presents potential credit risks: Barkin expressed greater concern about less visible exposures among financial intermediaries than the creditworthiness of major hyperscalers with strong cash generation.
- Post-midterm developments complicate the outlook: Possible restrictions on data-center construction could slow AI investment and ease some demand pressures, although neither official explicitly linked the election to a change in policy.
- December rate-hike expectations have moderated: The market-implied probability of another increase fell from above 80% on Wednesday to around 70% on Thursday, according to Reuters.
- The direction of policy is clearer than its eventual destination: Both officials favour further tightening, but uncertainty surrounding AI investment, financial conditions and incoming economic data leaves the extent of future increases unresolved.
