Fed’s Hammack supports gradual rate hikes to manage inflation

Cleveland Fed President Loretta Hammack reportedly expressed support for gradual interest rate increases as a means of bringing inflation under control. The core transmission mechanism is inflation repricing: a signal that the Fed favors continued tightening, rather than a pause or abrupt action, tends to push up the expected path of the policy rate and lift front-end Treasury yields. The move would most directly affect short- and intermediate-dated Treasuries, where yield curves reprice fastest, and rate-sensitive equities such as high-duration growth stocks, which are discounted at higher real rates. The U.S. dollar may firm on wider rate differentials relative to other central banks. Traders will be watching the next Consumer Price Index release for confirmation of whether core inflation is cooling enough to justify the gradual approach Hammack described.

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