Fed's Hammack warns of an "inflationary mindset"; by consumers' own 4.6% forecast, policy is not yet tight

Cleveland Fed President Beth Hammack said on Friday that the biggest risk with inflation now is that "an inflationary mindset" takes hold, after the public has lived with above-target inflation for an extended period. Speaking on a panel hosted by the Cleveland Fed with officials from the European Central Bank and the Bank of Mexico, she said the Fed needs to keep policy at a restrictive stance to bring inflation down, FXStreet reported. Hammack votes on rates this year, Newsquawk noted.

She also said growth has held up, the job market is stable, and consumer spending and business capital spending are both adding to price pressure. If the Fed does not make progress on inflation, she said, expectations could shift. On Thursday she had described the risks to inflation as tilted to the upside.

The mindset she is worried about is already in the survey

Hammack spoke on the same day the University of Michigan published its final September survey. Consumers now expect prices to rise 4.6% over the next year, up from 4.0% in August and the highest reading since June. Long-run expectations rose to 3.4% from 3.3%, above their 2024 range of 2.8% to 3.2%. The sentiment index fell to 48.1 from 51.7.

The long-run number is the one that speaks to her worry. A year-ahead forecast moves with gasoline prices. A five-to-ten-year forecast at 3.4% means households are no longer assuming the Fed gets back to 2%.

How restrictive is "restrictive"? It depends on which inflation you use

The Fed raised its target range to 3.75%-4% on Sept. 16, in a 12-0 vote, and the effective rate is 3.88%. Subtract inflation and the picture changes a great deal depending on the measure:

CPI figures are from the Bureau of Labor Statistics; the gaps are our arithmetic.

This is the part the headline misses. Core inflation of about 2.5% makes today's rate look clearly tight. But the gap between headline CPI of 3.4% and core of 2.45% comes from food and energy, and it is the headline number households feel and build their expectations on. Measured against what consumers say they expect, the real policy rate is below zero. That is the reading behind Hammack's call for a more restrictive stance.

What it means for borrowers

Traders already lean toward another hike. As of Thursday, CME FedWatch put the odds of an October increase at about 71%, FXStreet reported, and we covered the move in short-term Treasury yields earlier this week.

For a business on a floating-rate line of credit, each quarter-point hike adds $625 a year in interest on a $250,000 balance, about $52 a month. A contractor or distributor who carries a balance through the fourth quarter should budget for at least one more of those, because the officials who vote are describing policy as not tight enough yet, not as finished.

What to watch: the October 2 jobs report, and the October 14 CPI release. For how this plays out at the counter, see what 4.6% inflation expectations mean for a restaurant, a furniture store and a salon.

Sources: FXStreet; Newsquawk; Federal Reserve; University of Michigan Surveys of Consumers; Bureau of Labor Statistics. Real-rate and interest calculations are by The Company Chronicle. This is market information, not investment advice.