Trimming the Sails: Communicating My Reaction Function

Hammack uses an NABE speech to formalize her reaction function, and it lands unmistakably hawkish: she calls a restrictive stance appropriate to return inflation to 2 percent on time, says labor-market risks may now lean toward increased tightness, and flags that persistent inflation could point rates to "an even higher latitude." The document is a policy-lean statement, not a data dump, and it pushes back against any near-term cut bias at the front end. This is one voter's view, not the committee's.

What’s new: The direction is not a surprise: Hammack is a known hawk and the market already carries her there, so the tone itself is largely priced. What is genuinely new is the explicit tilt in her risk read: she says the employment-mandate risks "may now be leaning toward increased tightness," which undercuts the labor-weakness case for cuts, and she names a hike tail, saying elevated inflation or a budding inflationary mindset "could require pointing the bow of monetary policy rates toward an even higher latitude." The reaction-function framing is a communication choice, not new policy information.

KEY FINDINGS

• She says a restrictive monetary policy stance is appropriate to ensure a timely return to 2 percent inflation. Pushes against any priced-in easing and supports the front end staying higher for longer.
• She states that the risks to the maximum employment mandate may now be leaning toward increased tightness. Removes the labor-market-deterioration argument for near-term cuts, a hawkish shift in the reaction function.
• She says inflation that stays elevated or an entrenched inflationary mindset could require rates to go to an even higher latitude. Puts an explicit hike tail on the table, skewing front-end risk to the upside in yields.
• Inflation is broad-based: headline PCE 3.4 percent and core 3 percent in August, both above year-earlier levels, with trend inflation in the mid to high 2 percent range. Argues against looking through the cost shocks and for a more restrictive path.
• She flags a possible inflationary mindset, citing a District retailer that plans to raise prices by more than its input costs have risen. An upside risk to inflation expectations that would harden the case against cuts.
• She calls financial conditions neutral, not restrictive, given the recent rise in yields. Signals room to tighten further without choking demand, supporting the hawkish stance.

FROM THE DOCUMENT

Inflation that remains elevated relative to my forecast or the settling in of an inflationary mindset could require pointing the bow of monetary policy rates toward an even higher latitude.

The risks to our maximum employment mandate may now be leaning toward increased tightness.

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.

If the labor market shows convincing signs of deterioration, the path of policy would likely need to respond.