Investing.com -- Cleveland Fed President Beth Hammack signaled on Friday that the U.S. central bank may be forced to weigh tighter monetary policy later this year if inflation progress stalls, even as a cooling labor market adds a new layer of complexity to the Fed's dual mandate.
The remarks come as the US Dollar Index retreated 0.16% to 99.15 by 15:39 ET (20:39 GMT), with the 10 Year Treasury Yield settling at 4.131% following a disappointing February jobs report. Hammack expects price pressures to moderate, as she emphasized that the Fed might need to become "more restrictive" if inflation does not retreat toward the 2% target in the second half of 2026.
The Fed currently maintains its benchmark interest rate in a range of 3.5% to 3.75%, following a pause in January.
Labor market softens amid geopolitical oil shock
The Federal Reserve's policy path was further complicated on Friday by data showing the U.S. economy unexpectedly shed 92,000 jobs in February, pushing the unemployment rate up to 4.4%. The negative payroll reading marks the sharpest reversal since last year and clashes with the inflationary threat posed by surging energy costs tied to the ongoing conflict in the Middle East.
Hammack noted it is "too early to know" the full impact of the recent oil spike, which has seen Crude Oil WTI Futures surge over 21% since the start of joint U.S.-Israeli operations. Higher gasoline prices risk unmooring inflation expectations, potentially forcing the Fed to hold rates higher for longer despite signs of a sputtering job market.
"I try to look at what's the magnitude and what's the persistence," Hammack said of the oil shock. She added that the Fed will need to evaluate whether the disruption depresses growth and hiring before deciding on its next move at the March 17-18 policy meeting.
Financial stability and regulatory oversight
Beyond immediate rate concerns, Hammack addressed growing uncertainty in private credit markets, noting that while she sees no major systemic issues, troubles in that sector remain firmly on her radar.
The Cleveland Fed chief also defended the current banking regulatory framework, even as the institution considers lighter oversight measures under the current administration.
"I believe that the system has been made safer by a number of the regulations that were put in place," Hammack stated, arguing that these rules provided a "source of strength" during the pandemic and subsequent market stresses.
Investors are now pricing in a 97% probability that the Fed will leave interest rates unchanged this month, according to the Investing.com Fed Rate Monitor Tool, as policymakers attempt to balance the "risks" of a softening labor market against a renewed energy-driven inflation threat.