The Federal Reserve is preparing for a rate hike cycle, along with the rest of the world

Cleveland Federal Reserve President Beth Hammack believes the central bank should act before inflation becomes an even bigger headache.

Beth, speaking Monday at the annual National Association of Business Economists meeting, said policymakers would be better off taking small steps rather than waiting until they have to take drastic steps. She said:

“When feasible, I generally think it’s preferable to make smaller adjustments, and to do so relatively quickly, rather than to wait and risk needing a larger course correction.”

Beth is a voting member of the Federal Open Market Committee (FOMC), which makes her position particularly relevant as officials prepare for their remaining meetings this year.

“Considering all the inputs that factor into my reaction function, a restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation.”

This issue lies in the fact that pressures on prices go beyond just a few items. These pressures are throughout the economy and make it more difficult for the Fed to hit its 2% inflation rate target.

Another concern from Beth is regarding the scenario where Americans start viewing high inflation as a permanent fixture of their life. This could lead to expectations by both businesses and individuals affecting wages, spending, and prices.

“Long-run inflation expectations have stayed remarkably well anchored despite actual inflation being above target for more than five years. But I’m not taking that for granted. With each passing month, persistently elevated inflation raises the risks of an inflationary mindset becoming entrenched in the economy.”

The Fed already raised rates in September, its first increase in three years. Chair Kevin Warsh said the decision would “support a timelier return” to the central bank’s inflation objective.

“The plain fact is that inflation is too high and has been for too long.”

September’s meeting minutes revealed that most policymakers anticipated another hike before December ends. However, they left the timing open, with future decisions depending on economic conditions rather than a predetermined schedule.

The U.S. economy is making the Federal Reserve’s job complicated

Recent economic figures show exactly why the Fed has a difficult decision ahead.

August personal consumption expenditures (PCE) price index was recorded at 3.4% annually, while core inflation, excluding both food and energy, stood at 3%.

Alternatively, another view on the August data stated that both the headline PCE rate and the core rate were at 3% levels each matching July’s data and underestimating forecasts.

However, U.S. second-quarter GDP growth was upgraded from 1.5% to 2.2%, meaning that the economy was performing better than initially thought.

On the other hand, the labor market looks much weaker. The monthly change in payrolls in September was at only 29,000, being the weakest month of 2026.

As a result, policymakers face a dilemma. Raising rates will help curb inflation, however, the further hike will hurt the labor market.

Markets now do not see a rate hike in October. According to CME FedWatch estimates there is greater than 78% chance of no changes, while another estimate comes at 81%, which exceeds approximately 54% a month earlier.

In December markets see a chance of a rate hike at more than 88%. Borrowers and businesses now face the prospect of financing costs remaining elevated as the Fed considers further tightening and other central banks increasingly abandon rate cuts.