A Conversation with Federal Reserve Bank of Cleveland President Beth Hammack

One of my favorite parts of this job has been getting out in the community and really engaging with people in the region, getting to hear their insights and their perspectives, whether it's universities, businesses, individuals, employees. We want to understand how the economy is working for all individuals. We want to understand how all the residents, all the employees, even children, are experiencing things and what those opportunities look like. Our mission is to provide economic opportunity and economic growth for all. I'm traveling around the district, whether it be Toledo, Columbus, Cincinnati, Lexington, Worcester, all across the Fourth District, to really understand the experiences of individuals and businesses. This allows me to gain on-the-ground insights about what's going on in the economy across the Fourth District so that when I go to Washington DC, I can help represent the Fourth District perspective about what's going on in Ohio and how businesses and communities are faring in the economy here. That's really important given the Fed's decentralized structure. We have 12 regional reserve banks across the country and so each one of us bank presidents when we show up tries to bring a bit of that flavor of what's going on for the economy in our region. On-the-ground insights to me is sitting down and having conversations with these businesses and community leaders. I like to ask them about how they're seeing demand for their business, how they're seeing pricing pressures, are they able to charge more? Are they seeing labor issues? Are they able to find the talent that they need to fulfill their workforce and to make sure their business continues to grow? One of the visits recently, we went to see the NASA Glenn facility in Cleveland. It's a real anchor and it's a real magnet for scientific talent, and they're working on both development R&D for the next generation of things that may go out to space, but they're also working on innovations with local companies. They've designed non-pneumatic tires in partnership with Goodyear. And so they're taking advantage of the region that we're in to really ensure that they have the best ideas, the best innovations, and are contributing to the local economy. One of the things I love about the Fourth District is it's really a microcosm of the country. When you think about it, we've got manufacturing, we've got rural areas and farming, health care and education are large parts of our environment. We've got energy production. And so we have a little bit of everything in terms of what the overall US is experiencing. And so getting a picture on what's happening in each of those different areas from a business perspective gives me a clear view of how each different type of business, each different sector, is adapting to the economy and adapting to new policies.

That's great. Thanks and thanks so much for coming in, Laya. It's great to meet you and it's great to have this conversation. One of the things that I feel is really important is for people to understand who we are and what we do and all the resources that we offer. We get a lot of attention paid to us as a system about monetary policy. That is the thing that we are most well known for where we set interest rates. As you probably paid attention, we changed interest rates last week. The committee voted to reduce rates by 25 basis points. But we have four other functions that we spend a lot of time on. You know, we don't have 1,100 economists in the building. We have people who are doing lots of different things. And so across those different functions, we supervise and regulate the banks. That means that we ensure that the banking system is safe and can provide credit and help the economy continue to grow. We oversee financial stability. So that's really looking broadly across the landscape, whether it's coming from the banking system, from new types of technologies, from different pockets of the economy. We try to see are there bubbles forming? Are there issues that are happening? And we have tools that we can use in the event of a crisis as we did in 2008 and as we did in 2020 and 2023 to help make sure that the credit continues to flow, businesses and consumers have the monies that they need. We have our payment system. We foster the nation's payment system. So within Cleveland and Cincinnati, actually, we process dollar bills. So, you might not think about it, but actually at the bottom of this building, there is a vault with a significant amount of paper bills that we take from the banks and send back to the banks. And we have a whole team of cash processors who make sure that that is fit currency in everyone's wallets. And we have a team of law enforcement professionals who help guard the building and those assets. And then our last responsibility is consumer protection and community development. And this is really where we're out there engaging in the communities. We're not public policy makers. Our scope of policy is very narrow. It's just monetary policy. But we can study what's happening more broadly in the region. We can understand what are some of the barriers to individuals participating in the workforce. What's keeping them from being able to get a job? Is it their ability to have transportation? Is it affordable housing? Is it child care? And we can try to study what solutions others have come up with and we can try to amplify those through our research teams and help make connections and bring people together to work on those types of solutions.

Sure. So, we spend a lot of time looking at local communities. One body of work that the team had engaged in last year was around some of the flooding in Kentucky, in Eastern Kentucky, and what were the ramifications of that? What were some of the implications? How do we work? You know, one of the things I hear about a lot when I'm out in the district is that we really are in a two-speed economy. You've got the top end of the income spectrum who's doing incredibly well. Prices go up and they're just happy to pay them. They want whatever goods or services they want and it's fine. But at the lower and middle income portions of the communities, people are really struggling. They're having a hard time figuring out how to feed their families, how to find housing that's going to be safe and reliable. We hear constantly about individuals trading down. You know, we were in Cincinnati a few weeks ago, meeting with the Urban League and talking with some individuals who'd participated in a number of the Urban League's programs. And they were talking about, you know, they're in the supermarket and they have to make the decision they'd like to buy ground beef and they used to get 97% lean beef and now they're getting 85% lean beef because the pricing just doesn't allow for it. And so we try to study some of those different trends. And some of those trends that we learn about help inform me when I go to Washington and talk about what we're seeing. It helps me to understand how we should be setting monetary policy to ensure that the economy is growing and hopefully growing at all levels.

Yeah. So, it's really important work that's being done because I think what we find right now is that most of the families that are struggling are working families. It's not, you know, your old school viewpoint of these are people who are in poverty, they don't want to work, they can't do it. These are people who have reasonable jobs, maybe even like $22 an hour jobs who are earning $44,000 a year and for a family that just doesn't give them what they need. And so ensuring that when they get that next promotion, they move up, that they don't lose access to all of these different services is really critical. And you're right, the Atlanta Fed has really championed a lot of that work and a lot of that research that's been done, but we're trying to analyze how that's flowing through in Ohio as well.

Sure. So last week when we met in Washington DC, the committee voted 11 to 1 to reduce rates by 25 basis points. The genesis behind that was really that the balance of risks has shifted and that with some of the recent data that we saw around the employment side, it felt like the pressure that we're seeing on the inflation side of our mandate and the pressure that we're seeing on the employment side were coming into better balance. So as you know, we were created by Congress in 1913 with a mission of supporting all those different functions that we had talked about. More recently Congress changed the mandate to focus on both maximum employment and price stability. So we have two sides of our mandate that we're focused on and we have to balance those two and most times they work in the same direction. So when the economy is running super hot, everyone's got jobs, you have pricing pressures, those two things move in the same direction. It's pretty easy to know what to do as a monetary policy maker, that's a time we're supposed to tighten policy, raise rates, make it more expensive, take that cost of money higher so that people want to borrow less. On the opposite side, if you have a massive downturn, 2008, you have real strains. You're seeing people are out of work in a lot of places, you're not seeing pricing pressures. And that's a moment when we want to ease policy. We really want to lean in, make sure credit is flowing, make sure that individuals and businesses can borrow and get the economy restarted again. But right now is a unique time for monetary policy because we're being challenged on both sides of our mandate. We're being challenged both on high inflation. Inflation is running around 3%. Our goal is 2%. We've been running above that 2% objective for almost five years. And my forecast and many other professional forecasters would tell you that we're likely to see inflation continue to go up. So we're high and we're running in the wrong direction. But on the employment side, we've been running right around full employment. The unemployment rate is 4.3%. That's a pretty healthy rate. It's right around most estimates of that maximum employment number. But we got some data on headline payroll growth that dropped pretty significantly over the summertime. There's a question of was that just not a lot of jobs being created? Is that labor supply? The unemployment rate would tell you those two things are in balance, but the headline number looks like there's more softness there. And so that's something that we're watching carefully. We look at a whole host of other data as well to round out that picture. But when you bring the two things together, it seems like we've got inflation that's too high and heading higher and there's some signs of fragility in the labor market. When I'm out with businesses, the one thing that I hear repeatedly is that we're in this low hiring, low firing environment. I'm not hearing business leaders who want to shrink their workforce materially, but because people aren't leaving their jobs, there isn't that opportunity for new things. And so you're seeing that show up in some cyclically concerning segments of the population. So, it's really hard to get a job if you're a recent college graduate. If you're in that 16 to 24 year old age range, it's harder to find a new job because people aren't leaving their jobs. Black women in particular are having a tough time. You're seeing a spike in that unemployment rate. But when you look at other indicators, we look at in Cleveland, we've done a lot of work on WARN notices. So, those are the big notices that get filed before larger layoffs that are happening. Those have been pretty stable. They haven't trended up. You look at the vacancies to unemployed ratio, that number had been pretty stable around one, it's still right around one, and one actually is a pretty high reading for that. So if you go back to 2016, 2017, it'd been more like 0.7. And so you're still seeing some signs of pretty robust labor markets. But inflation is really quite high right now.

It's a great question. There's a lot of concern. I have a lot of concern about the level of inflation and the persistence of inflation. So when we have this challenging time where both sides of our mandate are in conflict, what I think about is how far are we away from target on each side and how long do I think that's going to last? We can think about, you know, on the labor side we're pretty close to our target. That 4.3% to me is right around a maximum employment type number. Now, I do anticipate that unemployment will keep rising a little bit. But if you look at those same forecasts, that summary of economic projections, it does look like it's going to come back in over that time horizon. On the inflation side, we are missing by a more meaningful number, by a full percentage point. We've been missing for four and a half years, and I anticipate we will continue missing for the next couple of years. And so we have to weigh those things when we're looking at it for individuals. You know, to me, that's why I am laser focused on inflation. And that's why to me I think that we should be very cautious in removing monetary policy restriction because I think it's important that we stay restrictive to bring inflation back down to target. We have this debate within economic circles and within the committee around what is the neutral rate? What's sort of that natural rate of interest? I have one of the higher estimates on the committee and I think we're only very mildly restrictive after last week's move. So, I think we are a very short distance to neutral and it worries me that if we remove that restriction from the economy, things could start overheating again. Now, if we see that happening, I have a lot of confidence that if we see good evidence that the economy is starting to overheat and is running at a hot level, that the committee is going to take action and is going to bring things back into a place so that we can meet both sides of our mandate. But I do have more concerns right now that if we remove that restriction too quickly, yes, it may help on the labor side, but I feel like the labor side is still in a pretty good shape and I'm really worried about what's going on with inflation.

So the team's done a lot of analysis, our economic research team has done a lot of analysis to look at what are the different segments that have been impacted by tariffs, whether it's the country level tariffs or it's the product tariffs on steel and aluminum and the like. We try to break down what is the actual tariff rate and what is showing through in the pricing. And so you can basically do a scatter plot and see, you know, this is what the tariff was. This is how much the price has gone up. Is that tracking along the line? Are there places where you're seeing more impact than what the tariffs would imply? Are there places where you're seeing less impact than what the tariffs would imply? We've been tracking reasonably well that tariffs are having the impact you would expect them to have in the economy. Now, tariffs happened at different moments throughout this spring and summer, and I think we've only recently gotten to a level where things are starting to settle in. And we're still seeing that the effective tariff rate, the actual rate that's being collected, the amount of money that's being collected, isn't quite at what you would expect given where the tariffs are. And so there's still maybe some room to go. Maybe that's a compliance issue. It could be that businesses are buffering some of that. We know businesses from my conversations out in the district, I heard that businesses bought a lot of extra inventory at the beginning of the year worried about tariffs. They're working through selling that. It looks like they might be at the tail end of that. And so one of the things we have to watch is are businesses still able to absorb that tariff impact or are they going to start pushing those prices out? I do expect that early next year we'll start to see another wave of pricing pressures. There are a lot of contracts that get negotiated at the beginning of the year and so we could see another wave of price increases that are happening in the first and second quarter of next year. So that's something we need to continue to watch.

I have every confidence that when I walk into the room that I and my colleagues sitting around the table are making decisions purely based on the data. So let's step back. What does independence mean? We are a system that was created by Congress. We are independent but we are accountable. We're accountable to Congress and that's important because the chair goes and testifies in front of Congress. The vice chair for supervision goes and testifies in front of Congress twice a year and it's important that people are asking us questions. They're sharing their opinions with us. They're expressing their views. There's a lot of very normal things that are happening in the world right now. And there are some unique things that are happening. Normal things are when I walk down the street, people asking me, you know, what's my view of monetary policy? Offering me their views of what should happen. The president offering his views. Other elected officials offering those views. That's totally normal. That's a healthy thing that needs to happen in our society. There are other things. We had an opening on the board of governors. The president nominated someone. They were approved by Senate. That's the process. That's how it's supposed to work. That is all totally normal. There's some more novel things that are happening. For the first time ever, we have a president who's trying to fire a sitting governor. And so we'll see how that plays out. There's a process for it and we'll see where that goes. But what's important to me when I think about independence is that when I and my colleagues walk into that monetary policy room, that we are able to make decisions based on data, whether that's hard data, stories that we learn from our district, individual experiences, but that we all bring our perspective, the diversity of how we all grew up in the world and we're making the decisions in that room to achieve that dual mandate of maximum employment and stable prices and that we're not thinking about anything else when we're trying to take those decisions.

It's a hard job. I signed up for it. I took the job because I wanted this hard job. I think most good jobs are hard. And I think that's the role is to make sure that you are taking into consideration all of the different elements. You can't just look at one slice of the population. You can't just look at one segment of the economy. We've got to look across the district and across the country to make sure that we're setting things appropriately.