Federal Reserve two voting members: Support keeping interest rates unchanged unless the U.S. labor market shows substantial weakness

On Tuesday local time, two voting members of the Federal Reserve expressed their hawkish stance, indicating that interest rates may remain unchanged for an extended period unless new and substantial signs of weakness emerge in the U.S. labor market to avoid reigniting inflation.

Cleveland Fed President: Interest Rates May Remain Unchanged for a Long Time

Cleveland Fed President Beth Hammack recently stated that interest rates may remain unchanged for a considerable time while Federal Reserve officials assess the continuously released economic data.

Hammack said on Tuesday, "Rather than trying to finely tune the federal funds rate, I prefer to be patient and observe the economic performance while assessing the impact of recent rate cuts. According to my forecast, we may remain on hold for quite a long time."

Hammack has repeatedly urged her colleagues on the Federal Open Market Committee (FOMC) to be cautious regarding rate cuts to avoid reigniting inflation. She supported last month's decision to keep rates unchanged after three consecutive rate cuts at the end of 2025.

Hammack shared a "cautiously optimistic" outlook, stating that fiscal support, lower interest rates, and other factors will drive U.S. economic growth, thereby boosting the labor market. She expects inflation to ease this year.

Hammack emphasized that if the economy underperforms, Fed officials need to remain flexible in their policy responses; she also expressed an openness to raising rates if necessary. "Currently, the risks of the federal funds rate moving higher or lower are roughly balanced. History tells us that flexibility is beneficial."

Hammack also highlighted the importance of the Fed's independence, which allows officials to make difficult policy decisions with the goal of long-term economic stability:

Hammack referenced the late Fed Chairman Paul Volcker in her speech. Volcker successfully curbed high inflation in the 1970s by significantly raising interest rates and triggering a recession.

In the Q&A session following her speech, Hammack stated, "Maintaining this independence is crucial so that we can make those tough trade-offs when necessary. Because sometimes, to maintain low inflation in the long term, short-term pain must be endured."

Dallas Fed President Supports Keeping Rates Unchanged

Dallas Fed President Lorie Logan also stated on Tuesday that interest rates should remain unchanged unless new and substantial signs of weakness emerge in the labor market. "In the coming months, we will see whether inflation is moving back toward our target and whether the labor market can remain stable." Logan is optimistic about inflation continuing to decline.

Logan said, "If that is the case, it would indicate that our current policy stance is appropriate, and we can achieve our dual mandate goals without further rate cuts. Conversely, if inflation declines while the labor market shows further substantial cooling, then another rate cut may become appropriate."

Logan expressed her support for the FOMC's decision to keep rates unchanged at the January meeting this year after three consecutive rate cuts at the end of 2025. She had previously publicly opposed rate cuts in October and December, citing that inflation remained too high and the labor market was in a balanced state On Tuesday, Logan reiterated the above stance. She stated that the hiring pace over the past six months has approached the "break-even" level estimated by her research team—meaning the rate of new job creation matches population growth; at the same time, she admitted that she is "not yet fully convinced that inflation is on a steady path back to the 2% target level."

Before becoming the president of the Dallas Federal Reserve, Logan managed the central bank's asset portfolio at the New York Federal Reserve. She also discussed the recent asset and liability measures taken by the Federal Reserve.

At the end of last year, as government borrowing increased and the Federal Reserve reduced its bond holdings, market volatility significantly intensified, and cash reserves in the financial system were drained. To alleviate this pressure, the Federal Reserve has since expanded its balance sheet again, purchasing approximately $110 billion in Treasury securities since December 12.

Logan stated that this process is technical and unrelated to the monetary policy stance itself, and should not be operated mechanically. She said, "The demand for reserves may change over time with economic growth, changes in banking and payment operations, and adjustments in the regulatory and supervisory environment. To maintain efficiency, the scale of reserves we provide needs to be adjusted up or down in line with these changes."

She added that if the Federal Reserve maintains adequate reserve levels in the banking system, money market rates (such as the general collateral rate for tri-party repos) should be close to the reserve balance rate over the long-term average.

Logan also reiterated her call for the Federal Reserve to provide centrally cleared transactions through the Standing Repo Facility and expressed appreciation for the high usage rate of this tool by the end of 2025, calling it an "encouraging signal."

U.S. Economic Data to be Released

Federal Reserve officials have recently been encouraged by easing inflation data and signs of some stability in the unemployment rate, but new data set to be released this week may test these judgments. The January employment data, delayed due to the recent government shutdown, will be released on Wednesday, while the next Consumer Price Index (CPI) report is expected to come out on Friday.

According to data released earlier on Tuesday by the U.S. Department of Commerce, retail sales in December were weaker than expected, with declines in 8 out of 13 categories.

U.S. President Trump has made it clear that he wants the next Federal Reserve chairman to lower interest rates. He stated this week that he believes Kevin Warsh, whom he nominated to replace Powell as Federal Reserve chairman, has the ability to achieve a 15% economic growth rate, highlighting the immense political pressure Warsh would face if confirmed.

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