Fed's Hammack: Economic Strength Argues Against Rate Cut

The Federal Reserve's decision to cut interest rates has been a hot topic in recent weeks, with many investors and economists eagerly awaiting the central bank's next move. However, not all Fed officials are on board with the idea of a rate cut, and one of the most vocal dissenters is Fed's Hammack. In a recent statement, Hammack argued that the economic strength of the US economy made a rate cut unnecessary, and potentially even harmful.

Hammack's assessment of the current economic landscape differs from that of other Fed officials. While many are concerned about the recent slowdown in inflation progress and the potential for a no-landing scenario, Hammack emphasizes the resilience of the US economy. He points to the impressive growth of ~3.0% q/q in the fourth quarter and the bounce back in job growth as evidence that the labor market is cooling but not crumbling.

The resilience of the US economy plays a significant role in Hammack's decision to argue against a rate cut. The strong economic performance, coupled with the recent slowdown in inflation progress, has led Chairman Powell to express renewed concern around inflation. This suggests a more modest easing approach, which aligns with the Fed's desire to pause cutting at its next meeting and maintain optionality.

Hammack's views on the potential impact of a rate cut on financial stability also influence his stance. He worries that lowering interest rates could increase the risk of financial stress in rate-sensitive sectors like commercial real estate and regional banks. This could potentially lead to tail risks for the broader financial system, a concern that was echoed by Powell in his recent remarks.

In his statement, Hammack highlighted several economic indicators to support his argument against a rate cut. He pointed to the impressive resilience of the US economy, with growth tracking ~3.0% q/q for the fourth quarter. Additionally, the bounce back in job growth last month suggested a labor market that was cooling but not crumbling, with the unemployment rate at 4.2% and projected to remain at 4.3% through 2027. Furthermore, both headline and core PCE projections were raised, indicating a slowdown in inflation. These factors, combined with the committee's slashed median policy rate projections signaling just two rate cuts next year, led Hammack to conclude that the economy was strong enough to warrant a pause in rate cuts.

Hammack's views on inflation and unemployment differ from other Fed officials. While Powell sees signs of cooling inflation and a labor market that is cooling but not crumbling, Hammack believes that the economy's strength argues against a rate cut. He is concerned that inflation is still elevated and that unemployment is not yet a pressing issue.

Hammack's stance on the potential impact of a rate cut on the financial system and economic stability is clear. He believes that the current economic strength and resilience of the US economy make a rate cut unnecessary. A rate cut could lead to financial instability, encouraging excessive risk-taking and asset bubbles. Additionally, a rate cut could potentially delay the necessary adjustment in the economy, prolonging the period of high inflation.

In conclusion, Fed's Hammack has made a compelling argument against a rate cut, citing the economic strength of the US economy and the potential risks to financial stability. While other Fed officials may have differing views, Hammack's perspective is supported by the impressive economic data and the Fed's desire to maintain optionality. As investors await the Fed's next move, they should consider the implications of a rate cut on the broader economy and the potential risks to financial stability.