Fed’s Hammack backs gradual rate hikes as AI spending fuels sticky inflation

Cleveland Fed President Loretta Mester's counterpart in this headline, Fed official Hammack, is reported to back gradual further rate hikes, citing AI-related capital spending as a source of inflation that is proving persistent. The transmission mechanism runs through inflation repricing: if investment-driven demand keeps core price pressures elevated, the policy rate must stay restrictive for longer, lifting real yields and compressing the expected path of cuts that markets have been pricing. Rate-sensitive segments such as long-duration growth equities and rate-dependent sectors would face the most pressure, while the dollar could firm on a higher-for-longer differential against other central banks. The most important near-term catalyst is the next Personal Consumption Expenditures (PCE) price index release, where traders will test whether core services inflation is cooling enough to justify a pause rather than a hike.

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