Fed signals possible rate hike if gas-driven inflation stays above target

Beth Hammack, president of the Federal Reserve Bank of Cleveland, said Monday that the Fed might not be moving in the direction of rate cuts if inflation remains above its 2% goal, even as the central bank continues to watch whether higher energy costs are cooling economic activity. In an interview with The Associated Press, Hammack said her general preference is that the Fed keep its benchmark interest rate unchanged “for quite some time.”

Hammack also laid out the conditions under which policymakers could shift away from that approach. She said the Fed might need to cut rates if higher gas prices cause the economy to slow and unemployment to rise. But she said that if inflation remains elevated, a rate hike could be needed—framing the decision as a response to which risk plays out more strongly: sticky prices or weakening labor conditions.

“I can foresee scenarios where we would need to reduce rates … if the labor market deteriorates significantly,” Hammack said. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”

Her comments come as energy costs tied to the Iran war have pushed gas prices higher, complicating the Fed’s effort to return inflation to target while also pursuing maximum employment. The AP reported that the inflation outlook had already been elevated before the Iran war, and that gas prices tend to feed directly into household budgets and broader consumer demand.

The government will update two inflation measures this week, though only one is expected to reflect the impact of higher gas prices after the Iran war began Feb. 28. Gas prices averaged $4.12 a gallon nationwide Monday, according to AAA, up 80 cents from a month earlier.

On Friday, the government will issue the March inflation report, providing a first read on the impact of higher gas and energy prices. Economists expect annual inflation will worsen to 3.1% from 2.4% in February, according to a FactSet survey, and they expect consumer prices rose 0.8% in March from February, which would be the biggest increase in almost four years.

Separate from the March report, the Commerce Department will release the Fed’s preferred inflation gauge for February on Thursday, the AP said, and that figure would not incorporate any impact from the Iran conflict. Hammack said the Cleveland Fed’s own estimates show inflation could reach 3.5% in April, which she described as the highest since 2024, and she said inflation has been running above the Fed’s target for more than five years.

In remarks about the stakes for monetary policy, Hammack said higher gas prices are a major concern for residents in her district, which covers Ohio and parts of Pennsylvania, West Virginia and Kentucky. She said the issue is “the No. 1 thing” people in her district raise with her because it takes a growing share of their paychecks. She added that she expects consumers to respond to higher gas prices by cutting back spending elsewhere, potentially weakening growth and leading to layoffs—conditions the Fed would need to address with rate cuts.

Hammack also indicated that the duration and magnitude of the Iran war’s effect on gas prices and other costs would matter for how policy evolves. Now in its sixth week, the conflict has already lasted longer than she expected when the Fed last met March 17-18, she said, underscoring how quickly the inflation-employment tradeoff facing the Fed can change as new data arrive.