Traders brace for prolonged rate hold amid inflation doubts, policy split widens

Federal Reserve official Beth Hammack signaled on Sunday that she expects the U.S. central bank to hold interest rates steady for months, according to a Wall Street Journal report. The Cleveland Fed president expressed concerns about persistent inflation, even after the Fed cut rates by 75 basis points over the past three meetings. She emphasized that she had opposed the rate cuts, which were driven by fears of a fragile labor market according to the report.

Hammack told the Journal that she believes the Fed can maintain its current policy of keeping the benchmark rate in a range between 3.5% and 3.75% for some time. She cited uncertainty about whether inflation will fall back toward the central bank's 2% target or whether employment conditions will deteriorate further according to the report.

Her comments come amid a broader debate among Fed officials about the appropriate path for monetary policy. In recent months, several policymakers have pushed for a more aggressive easing approach, citing softening labor market data and slower economic growth. Hammack, however, remains cautious, noting that recent inflation readings may be understated due to data collection issues during a government shutdown in October according to the report.

Inflation Concerns and Data Distortions

Hammack highlighted that the Bureau of Labor Statistics had not released an unemployment figure for October 2025, which added uncertainty to the economic outlook according to the report. She also pointed out that the November inflation reading of 2.7% year-over-year was likely lower than the true rate of inflation, which she estimated could be closer to 2.9% or 3.0% according to the report. This discrepancy, she argued, was due to distortions in the data caused by the government shutdown.

The Fed official emphasized that she was not convinced that the current rate was too high, despite the fact that the central bank had cut rates three times in a row. She suggested that the economy might be operating below the so-called neutral rate, which is the level of interest rates that neither stimulates nor slows economic growth according to the report.

Market Reactions and Policy Outlook

Hammack's stance has implications for the Fed's next policy moves. She indicated that she would not support further rate cuts unless there was clear evidence that either inflation was falling back toward target or that the labor market was deteriorating significantly according to the report. This view contrasts with some of her colleagues, who have argued for more aggressive action to support economic growth.

The Fed has been closely monitoring wage growth, which has remained relatively strong across different income levels according to the report. Data from the Federal Reserve Bank of Atlanta shows that median wage growth has averaged around 5–7% over the past few years according to the report. This suggests that inflationary pressures may remain embedded in the economy, at least for now.

Meanwhile, the S&P 500 has shown mixed performance in 2025, with earnings estimates and stock prices fluctuating in line with broader economic conditions according to the report. The market has also been influenced by developments in the tech sector, with spending on data center construction reaching $3 billion in recent months according to the report.

Risks to the Outlook

Despite the Fed's cautious approach, there are risks to the economic outlook. One concern is the impact of tariffs on inflation. Hammack noted that higher input costs, including those from tariffs, could lead to larger price increases in the first quarter of 2026 according to the report. This could complicate the Fed's ability to achieve its inflation target and may force policymakers to reconsider their stance.

Another factor is the political environment. President Trump recently announced plans to cut interest rates aggressively and promised a new Federal Reserve chair who would support that goal according to the report. These statements have raised questions about the independence of monetary policy and could influence market expectations.

For investors, the uncertainty around the Fed's path forward remains a key factor. With the central bank poised to maintain its current policy stance for now, market participants will be watching for any signs of shifting inflation dynamics or labor market weakness according to the report.