WASHINGTON — A senior Federal Reserve leader indicated Monday that borrowing costs might need to rise if price increases continue surpassing the central bank’s 2% goal, signaling some policymakers are reconsidering their previous inclination toward lowering rates.
Cleveland Federal Reserve Bank President Beth Hammack told The Associated Press during an interview that she generally favors maintaining the Fed’s key interest rate at current levels “for quite some time.”
Hammack explained the central bank faces challenging scenarios in both directions. She noted the Fed might need to lower rates if elevated gasoline costs trigger economic slowdown and job losses. However, persistent price increases could necessitate rate increases.
“I can foresee scenarios where we would need to reduce rates … if the labor market deteriorates significantly,” Hammack stated. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”
These remarks indicate mounting worry among certain Fed officials that price pressures, which were already elevated before the Iran conflict began, might require rate increases to control. Such action would represent a dramatic reversal from late 2024, when the central bank reduced its primary rate three times.
Additional Fed leaders have recently suggested rate increases remain possible, including Chicago Fed President Austan Goolsbee. Meeting minutes from the Fed’s late January session revealed several of the 19 rate-setting committee members favored modifying their post-meeting statement to acknowledge potential “upward adjustments” to rates.
Any rate increase would likely trigger strong criticism from President Donald Trump, who has repeatedly attacked the Fed for not cutting rates more aggressively. Trump has advocated reducing the central bank’s benchmark rate to 1%, compared to its current level near 3.6%.
Two inflation reports are scheduled for release this week, though only one will likely capture the effects of gasoline price increases since the Iran war started February 28. According to AAA, gas prices reached $4.12 per gallon nationally on Monday, representing an 80-cent increase from one month ago.
Friday’s March inflation data will provide initial insight into how higher fuel and energy costs affected consumer prices. Economic forecasters predict annual inflation will worsen substantially, climbing to 3.1% from February’s 2.4%, based on FactSet polling. Monthly price increases are expected to reach 0.8% from February to March, marking the largest jump in nearly four years.
The Commerce Department will release the Fed’s preferred inflation measurement for February on Thursday, though this data won’t include any Iran conflict impacts.
Hammack revealed Cleveland Fed projections suggest inflation could hit 3.5% in April, which would mark the highest level since 2024. Price increases previously peaked at 9.1% in June 2022 before gradually declining.
“Inflation has been running above our target for more than five years now,” Hammack observed, noting further increases would mean prices are “moving in the wrong direction, away from our 2% objective.”
Congressional mandate requires the Federal Reserve to pursue both low inflation and maximum employment, and rising fuel costs could jeopardize both objectives, explaining why officials like Hammack stress the “two-sided risks” facing the central bank.
Higher gasoline prices may prompt consumers to reduce spending in other economic areas, Hammack explained, potentially causing weaker growth and job losses that would require Fed response through rate reductions.
The war’s economic impact depends on its duration and how long it elevates fuel and other costs, Hammack said. Now in its sixth week, the conflict has already exceeded her expectations when the Fed last convened March 17-18.
Rising gas prices from the Iran war represent “the No. 1 thing” Hammack hears about from residents in her district, which encompasses Ohio and portions of Pennsylvania, West Virginia, and Kentucky.
“We know that causes a lot of pain personally, as it eats up a bigger and bigger share of people’s paychecks. So it’s important for us to stay focused on it,” she concluded.
