Cleveland Fed President Beth Hammack Participates in Fireside Chat with Pittsburgh Economic Club

Well, thanks so much for having me first of all. It's great to be here in Pittsburgh and in the region. I try to make it here once a quarter to visit. We have a branch in Pittsburgh, as we do in Cincinnati, in our main office in Cleveland. So, as you said in my biography, I spent three decades in finance and one of the most rewarding things professionally that I got to do during my career was serve on some of these advisory committees. And so it put me in the room with members of the Treasury Department, members from the Board of Governors, and I got to understand and appreciate some of the challenges and hear the questions they were asking. And I realized at some point in my career as a finance professional you spend a lot of time thinking about what the Fed will do. And at some point it became a more interesting question to me. Not what would they do, but what should they do? And I wanted to make that shift from being someone who was a policy watcher to being a policymaker. And so this has really been, for me just an incredible highlight for my career and just really an honor and a privilege to be able to offer all the things that I've learned over the three decades of my time and try to help bring that to bear. I moved to Cleveland from the New York area where I had been before, but we have roots. My family has roots in Cleveland. My husband grew up there and his family's still there. So it's nice to be in a place where we have friends. And I grew up in the commonwealth of Pennsylvania, although at the very other end of the state, outside the Philadelphia region.

So the fourth Federal Reserve District, which is what Cleveland represents, is all of Ohio, Western Pennsylvania, Eastern Kentucky, and just the northern panhandle of West Virginia. So that's the region that we encompass. What I love about this region is that it's really a microcosm of the country. And so when you look across the district, you've got strong representation from eds and meds, whether it's in the Pittsburgh area or in the Cleveland area that's got leading hospitals in both areas and leading universities. You've got agriculture 'cause there's a variety of rural parts of the state. You've got real roots in manufacturing and also the transition from manufacturing to the services sector and the emerging technology growth that you've seen. You also have energy production, that's a big focus here in the Pittsburgh region, but also in other parts of the district, that's another place that things are focused. And so it gives me a really good bird's eye view of many different segments of the economy and how they're performing. And so for me, one of the really important parts of the job is in trying to set monetary policy, which is only one of five things that we do at the Fed, but it's the one that most people pay attention to. It's really important to have a good view on how the economy's performing and how it's performing for everyone. So the official sector data that we get from the BLS and from other official sources gives us good aggregate viewpoints on things. But I always try to supplement that with both private sector data and then conversations with businesses and local leaders because they'll give you more of a different feeling of how things are going. And it really, to me it helps the numbers to come alive and it helps to really put a face to what's happening. And, over the past 45 days, while the government has been closed, it's been really one of the primary sources that I've relied on to get a read on how the economy is faring. And I find it at almost all times that the stories, the anecdotes that I get from these conversations tend to be leading indicators of where the economy's headed. And so I find that putting that whole picture together, the official sector data, the private sector data and then the anecdotes, conversations and stories that I get from these small group meetings really helps me to have a good understanding of where the economy is.

So we have a branch in Pittsburgh and, Russ Mills, who's our... Oh there he is. He's up there, who's our regional executive is here. We try to stay really well connected in the region and try to understand what's happening. And we have a Risa of data that we put together at the Cleveland Fed. And so whether it's analyzing different regions, the performance, the challenges that you're seeing in each of those areas, we really try to share the data that we have and share the insights that we have from the community. So one of the things that all the federal, all 12 Federal Reserve banks do is we put out on the same cycle as the F1C something we call The Beige Book, which is a compilation of all the stories and conversations that we've had with businesses and community leaders in our district to understand how they're faring. We at the Cleveland Fed have turned all of those stories into a set of indices that we call our SORCE without a U, survey of regional and consumer expectations, regional conditions and expectations, thank you. And we put it out in an index. So what's great is that you can see the same data that I'm seeing in nearly real time. So we put that out so that the full community can see it and you can get different cuts of it as it may be of interest.

So the Fed has five main functions and setting interest rate policy, monetary policy is the one that we are certainly most well known for. That's the one that tends to get a lot of the headlines. But there are four other key functions. The next one is financial stability. That was really the reason for our founding, was in 1913, after a number of different panics trying to make sure that you had a central bank who could be the lender of last resort and it could survey the landscape. And so today we still spend a lot of time surveying the landscape to understand where there may be pockets of emerging weakness or things overheating that are worth paying attention to. Closely related to that is our responsibility to supervise and regulate the banks. So regulation, regulatory policy is set by the Board of Governors in Washington, and then the supervision is delegated to each of the 12 reserve banks. And so within the Cleveland Bank, we supervise about 250 financial institutions, from banks to credit unions, to some insurance companies to try to make sure that they are strong and safe. And by having a strong and safe banking system that makes sure that we have credit flowing through all the different sectors of the economy. The fourth function that I'll mention is consumer protection and community development. So we work with the banks in the region, we work with community organizations in the region to understand what some of the key challenges are. And to help make sure that we are identifying what those issues are helping to elevate and share best practices and new ideas. So we don't set community policies, but we can study problems, particularly problems related to workforce development, housing affordability, or small businesses. Those are places that we tend to focus because those really help drive the economy. And so at the Cleveland Fed, we run a small business credit survey every year nationally, and it gets responses from more than 10,000 small businesses across the country. And it helps to inform us and our colleagues around the Federal Reserve system, around how small businesses are faring, what they're doing, how their access to credit is and how that's helping to support the economy overall. And then the last thing that we do is we help run the nation's payment system. And so that can be from something as granular as making sure you have fiat currency in your wallet. So if you have a paper bill that you look at, it'll have a letter on it, Most often if it has a D that means it was ordered and processed by the Fourth District in Cleveland. We also in Cleveland Risa all the payment receipts for the US Treasury. So the federal reserve system as a whole serves as the fiscal agent for the US Treasury and different banks across the system play different roles. So the New York Bank helps with the auctions and debt issuance. In Cleveland, we help with receipts outside of tax receipts and in, Kansas City, they help with all the disbursements that happen through the system and so we're working very closely with the Treasury department to help make sure that they have access to the payment rails and that payments are going out in the right form and fashion. Most recently we've been shifting and focusing on instant payments as that's been an increasing area focus for consumers and businesses. And so the Fed launched FedNow a few years ago, which is our real time payment system. And so that's continuing to develop it, but we'll stay on top of other developments in the payment space as well.

So the US economy has been remarkably resilient. We're coming out of this period of the government shutdown and hopefully we'll start getting some new data. We'll get the September data. I'm not sure if we'll get October data, but as I've mentioned, we're supplementing that with other pieces. When I'm out in the region talking with businesses, what I hear most frequently is that inflation is still too high and it's been heading in the wrong direction recently, it's actually been moving up away from our target rather than down towards our target. We have a dual mandate, so we focus both on the inflation side as well as on the employment side. The employment side is also being challenged in that we're starting to see some softening in the labor markets. We've had a really robust labor market over the past several years. Coming out of 2021 and the pandemic, it was very difficult to hire people. You had an extremely tight labor market and we've seen that move to a more stable level. We're now right around 4.3%, which is right around my estimate of maximum employment. And so when I look at the economy overall, just looking at the data as we've got maximum employment I think around four and a quarter, right now we're around 4.3. On the inflation side, our target is 2% and inflation's running around 3%. Now some of that may be related to tariffs that have been implemented this year, but there is pressure and continued upward pressure in inflation in the services sector and that's harder for me to see as being related just to the tariffs. And so when I look at the balance of where we are from a monetary policy perspective and because both sides of the mandate are being challenged right now, I mean this is a difficult time for monetary policy, but when I look at both of those things, on balance I think we need to remain somewhat restrictive to continue putting pressure to bring inflation down towards our target. So when I'm out talking to businesses, I hear them thinking about their margins, how much have they passed on of price increases that they've seen, whether it's in goods, whether it's in insurance, which is an area that I hear very frequently that prices are continuing to go up, whether it's in energy costs. They're thinking about how they can pass that on to their clients. And I would say that I generally hear that nobody wants to be the first one to raise prices. We were at community receptions in Columbus and in Cincinnati and talking with some business leaders there and they're each feeling pressures in different ways. Some construction companies, grocery retailers, some manufacturers. And many of them are seeing pressure both on the insurance side as well as on their input costs into the manufacturing products, into raw materials as well. And they're trying to figure out what can they pass along, what can they not. What I've heard from businesses is that they've actually absorbed some meaningful amount of the tariff pressures and the increased costs that they've had over the past three to six months, but they can't do that forever. And so they're going to have to start passing more of those costs into their prices. And so I expect that we will continue to see some elevated pressures in inflation into the end of this year and into the beginning of next year. And so again, that's what tells me that we should be leaning on that somewhat restrictive stance of policy to make sure that inflation is still coming back to target. Now I do watch the labor market closely, as we talked about, it seems to me to be broadly in balance although there are some signals that we're getting that are certainly things that I wanna watch closely. So whether that be the recent very high profile layoff announcements that we've seen, whether that be the headline payroll numbers that went from being in the hundreds of thousands per month to being in the tens of thousands per month, that's a pretty meaningful drop off. But when you see that type of a drop off, you have to unpack is that coming from the demand side of the equation or the supply side of the equation? Given the very significant changes that we've seen in immigration policies in the US, it could be that it's coming more from the supply side of the equation. And so to me the best statistic to encompass both sides of that is really looking at that unemployment rate. So that's why I'll be looking at the September data that comes out. I don't know that we'll get October data, but hopefully we'll have November data coming out as well in early December. And so those will be places that I'll look to see is employment continuing to stay broadly in balance. Again, some signs of cooling over this recent period, but to me generally broadly in balance. And so I have to weigh both of those things. Inflation that's missing by a full percentage point. Employment that's missing by a couple of tenths right now. But again, looking at the trajectory of where we're headed because the forecast is really what I need to be focused on.

There's been a lot of discussions of Fed independence recently. Fed independence is critically important for making sure that we can deliver on those dual mandated objectives. So to make sure that we can deliver on stable prices and maximum employment. I need that when I and all of my colleagues walk into the FOMC policy room, that we are focused squarely on the data, on the stories that we're hearing and on the experiences that the Americans are having with the economy. And we're using only those factors to help set policy to steer the economy to our dual mandate objectives. Politics should play no role and does play no role in setting of policy. And that's what being independent means to me. Is that when I walk into the room, I'm squarely focused on the data and making sure that I'm making good decisions over the medium and long term to ensure that we're delivering on both sides of the mandate. And so having an independent central bank will deliver more stable, lower inflation outcomes, have healthier employment outcomes over the long term. You see that most central banks around the globe are actually moving towards greater independence because you have so much strength that comes from those better outcomes with an independent central bank.

Yeah, it's hard to go to a meeting with a company or a community organization and not talk about AI. It really is the hot topic in almost every room. And this is a really exciting technology and what's wonderful is that the Pittsburgh area is at the center of it, whether it's Carnegie Mellon University, whether it's all of the tech sector companies here that are looking at AI or robotics or other machine learning techniques. There's a lot of great innovation that's happening right here. And so I think it's a really exciting time. Anytime you have one of these new technologies, there's gonna be a lot of promise and a lot of upside, but it could be a time of radical change and radical transformation. And so I think right now it's a little too soon to say exactly what the possibilities are gonna be and how it will play out. If you go back and look in the late '90's early 2000s and look at how the internet had transformed things, you had a period where there was a lot of excitement and you saw markets pricing in a lot of excitement, maybe getting them ahead of themselves a little bit. And then you saw things taper off as sort of... Not every company that just was internet attached was going to be able to continue to excel. But look at where we are now with the internet. And so we had this huge boom, a little bit of a correction, but if I'd told you in 2000 that the internet would be as core to your and fundamental to your everyday lives as it is today, I don't know that you would've believed me or understood that. And so it may be that as we're living through this AI adoption moment, companies, businesses, communities are figuring out how to take advantage of it, how to use it to help support and compliment their work. And it may be that some of the valuations you see in the market may be getting outta themselves. They may not be, I don't know, time will tell, but I do expect if this technology is as transformative as what I hear in these rooms that you will see 20 years from now, it having completely reshaped how we do things. I hear a lot from businesses, well I hear a lot from communities that they're worried about being replaced by AI. And in my conversations with businesses, what I more often hear is not about replacement of individuals, but it's about helping to support the work of individuals. It's enhancing the experience of their employees. It's about making their employees work smarter faster, provide better insights so you can have a better client experience. More targeted sales teams and analytics. And so I think that anytime you have these transformative technologies, it can be disruptive and there's a lot of change that will happen, but I think there's a lot of possibility for how this can enhance the existing workforce and help to upskill and change the way that we're engaging in the work that we do.

When I'm traveling the district, I see a lot of collaboration between the private sector and the public sector. I see businesses who are very engaged, very committed to their cities and their regions and helping to invest and make sure that the city can be as vibrant as possible. Across the fourth district, most of the cities are at a place where I'd say it's been low population growth. And so very often what I hear from businesses is actually they have a hard time finding workers because there just aren't enough people around. And so attracting and retaining young people to stay in the area is a challenge in many of these cities. What I think is fantastic in the Pittsburgh region that I see is I see real innovation happening here. And I think because of the placement and the technology leadership that you have in this area, you're really well positioned to take advantage of these new technologies that are happening. And so, the focus on data centers, which different cities have different perspectives on whether or not they really want to commit to data centers, but I see a lot of excitement about the possibility here. And yes, it draws on energy resources and it draws on water resources, but it brings a lot of jobs through the development of those centers, through the building plans and through continual upgrades that need to happen over time to keep the technology fresh. And so I think there's a huge upside and possibilities in this region, particularly 'cause of that. There's a lot of other exciting investment going on, whether it's US steel and Nippon steel, billion dollar investment, that's really exciting. And then some of the commitments to continuing to develop in the energy sector here that we see, whether through Duquesne or through Westinghouse, I think there's some different places that there are some exciting things that are happening.