A Conversation with Cleveland Federal Reserve President Beth Hammack 6.02.2026

Thank you Baiju for that very kind introduction. And thanks to the 50 Club of Cleveland for kicking off the discussions to make this event a reality, to the Greater Cleveland Partnership for helping organize the event with us, and to the City Club for hosting us today. I'm going to start by looking back at history, my own. As an aspiring history and economics major in high school in the late 1980s, I myself might qualify as ancient history at this point. But I want to take you back to 1988. Ronald Reagan was president. You may have been carrying around a pager and Bernie Kosar was featured on the cover of Sports Illustrated. A hip-hop song called It Takes Two by Rob Base and DJ E-Z Rock was playing on the radio. Now, if you didn't hear, Rob Base passed away recently. So this song has been top of mind for me. And in case you need a reminder, the refrain goes, 'It takes two to make a thing go right. It takes two to make it out of sight.' So, I apologize for my singing voice and for my questionable taste in music. And because I'm pretty sure that the musical preferences of my colleagues on the Federal Open Market Committee are substantially better than my own, I'll point out that these are only my views musically and otherwise. What I'm not going to apologize for is that song playing on a loop in your head for the rest of the day because I want you to use it to remember something. 2% is the Federal Reserve's inflation objective. In my remarks today, I want to explain why the FOMC aims to achieve 2% inflation, why it matters that we get inflation back to this level, and how I see current conditions and monetary policy. The TL;DR version for today: it's reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent data trends continue, it may soon be appropriate for policy to act to address the growing risks of persistently elevated inflation. By the time I'm done today, I hope you'll understand why I believe 2% inflation helps to make the economy go right and why getting inflation back to this level in a timely manner will make it out of sight. So to understand why the FOMC chose 2% as its objective, it helps to remember where we come from. So, a short history lesson on this, too. The 1970s and early 1980s were a painful period for Americans. On two separate occasions, within a single decade, we experienced double-digit inflation that stretched many people's ability to afford even basic items. Some of you may remember those days of long lines at the gas stations, rapidly rising grocery bills, and double-digit mortgage rates. These weren't abstractions. They were lived experiences that shook confidence in the American economy. Central banks around the world took notice and academic researchers began asking a fundamental question. How do you prevent high inflation episodes from ever happening again? The initial answer that emerged was inflation targeting. The practice of a central bank announcing a specific numerical goal for inflation and organizing policy around achieving it. New Zealand was the pioneer establishing the world's first formal inflation targeting framework in 1989. The logic was straightforward. If the public knows where inflation is supposed to go, they can plan accordingly, hold the central bank accountable, and help keep inflation anchored through their own expectations. Country after country followed New Zealand's lead throughout the 1990s. The path to defining the inflation objective in the United States took a little bit longer. In setting out the objectives for monetary policy, Congress tasked the FOMC to promote the goals of maximum employment, stable prices, and moderate long-term interest rates. Low and stable inflation helps to keep long-term interest rates at moderate levels. So, achieving the maximum employment and price stability is often referred to as the FOMC's dual mandate. Through the 90s and into the 2000s, the FOMC debated and wrestled with how to square a specific inflation goal with our dual mandate. The resolution was flexible inflation targeting, an approach that allowed the committee to pursue both low inflation and maximum employment without treating one as superior to the other. Since the Federal Reserve Act does not define price stability, implementing this approach called for communicating an inflation objective to the public. At first, the FOMC indicated where it thought inflation would go in the long run under appropriate monetary policy. In January 2009, the FOMC's longer-run projections of inflation were all in a narrow range between 1.5 and 2%. In January 2012, the FOMC formalized its explicit inflation objective in its statement on longer-run goals and monetary policy strategy. That statement declared that 2% inflation as measured by the personal consumption expenditures price index was most consistent over the longer run with its statutory mandate. That commitment has been reaffirmed each year since then, most recently this past January. Now, before turning to current economic conditions, it's worth pausing on three reasons why the 2% objective matters, not as a theoretical construct, but as a practical foundation for sound economic decision-making by businesses, consumers, and investors. The first is that high inflation imposes substantial costs on the economy. Costs that are familiar to anyone who has run a business through a period of sustained price increases. When inflation is elevated and unpredictable, long-term planning becomes difficult. Capital investments are harder to make when input costs cannot be reliably projected. Multi-year contracts become sources of risk rather than stability. I hear this consistently from businesses across the fourth district. Inflation does not merely raise costs. It raises uncertainty. And sustained uncertainty is a meaningful drag on investment and productivity. These costs extend well beyond the business sector. In a high inflation environment, consumers must make hard tradeoffs. I was just in Erie, Pennsylvania, and heard from a father who says he hasn't been able to travel to his son's spring football games this year because keeping the gas tank full takes up too much of his budget. And he'd never missed a game before. High inflation can significantly erode the purchasing power of those on fixed incomes and of workers' wages if those wages don't keep up with prices. Lower income households who devote a larger share of their budgets to necessities such as food, housing, and energy often experience higher inflation rates than others. The second consideration speaks to the tools of monetary policy itself. One might reasonably ask, if inflation is costly, why not aim for zero? There is evidence that consumers prefer very low inflation, and zero inflation would avoid the associated costs for households and businesses. However, many academic studies do not find that this is optimal for the economy. Very low inflation runs the risk of slipping into deflation or falling prices. Something which is usually a symptom of a weak economy and can bring a new set of challenges for businesses and consumers. A key issue for monetary policy is how far nominal interest rates can decline, especially below zero or what is sometimes referred to as the effective or zero lower bound. A modestly positive inflation objective preserves room for monetary policy to stimulate the economy when conditions deteriorate. The 2% objective provides a buffer in case of a downturn while limiting the extent to which inflation is a burden on households and businesses. The third consideration is the role of credibility and inflation expectations. FOMC communications anchor inflation expectations and these expectations affect the decisions that shape actual inflation outcomes. What you think will happen to prices matters. When businesses set prices, when workers negotiate wages, when finance teams build multi-year forecasts, they are all implicitly forming expectations about where inflation is heading. If these expectations are anchored at 2%, the resulting wage and price setting behavior tends to be consistent with keeping inflation near that level. If longer-term inflation expectations move away from an announced inflation objective, this is a potential sign that the central bank is losing credibility. The longer inflation remains above our goal, the greater the risk that it feeds into expectations and becomes embedded in wages, contracts, and pricing behavior. This is why I often use the phrase 'in a timely fashion' when I speak of returning inflation to our objective. The passage of time can shape both the persistence of elevated inflation and the difficulty of addressing it. Restoring price stability once high inflation has become entrenched is possible, but the historical record is clear that it is costly. In the early 1980s, then Fed Chair Paul Volcker had to take the unpopular step of sharply raising rates to get inflation under control. The disinflation ultimately succeeded, but it required the most severe recession in a generation to do so. A clearly communicated, credible inflation objective is the mechanism by which we attempt to avoid repeating the experience of that episode. Taken together, these considerations lead me to conclude that keeping inflation low, stable, and well anchored at 2% is not a technocratic preference or an end in itself. It is the foundation for an economy in which people can plan for the future and the costs associated with inflation are kept to a minimum. Price stability is a key contributor to economic growth and maximum employment in the longer run. So, as is hopefully clear, I'm firmly committed to the FOMC's 2% inflation objective, but I'm also committed to our maximum employment objective. The dual mandate means that monetary policy needs to balance achieving low inflation with maintaining the health of the labor market. This requires monetary policy makers to consider where inflation and the labor market are relative to our goals both today and going forward. With this in mind, let me turn to economic conditions and what it means for my policy outlook. The biggest economic storyline this year has been the surge in oil and gasoline prices and the disruption in global supply chains following the start of the conflict with Iran. Sharp increases in oil prices can pose a challenge to monetary policy. They raise production costs for many goods that derive from oil and rising gasoline prices increase transportation costs. These forces put upward pressure on the prices of many goods and services challenging the inflation side of our mandate. On the employment side, higher gasoline prices can slow consumer spending and in turn economic activity and employment growth. While higher inflation usually calls for more restrictive monetary policy, a softer labor market usually calls for more accommodative monetary policy. To balance these two outcomes, it's sometimes best for policymakers to look through an oil shock by holding interest rates steady. What I hear from leaders like you when I'm out traveling the district is that the economy has been resilient so far despite higher oil, fertilizer, and chemical prices. Consumer spending has continued to rise at a moderate pace. Businesses have been ramping up their spending on AI-related investments in data centers, computing equipment, and software. In spite of elevated uncertainty, most conversations that I've had with business leaders indicate expectations for solid activity in the coming months. The Cleveland Fed's source indices, which summarize what our regional business contacts are telling us about the state of the economy, show strengthening business conditions, employment, capital expenditures, and cost pressures. You can find these indices on our website, clevelandfed.org. More broadly, measures of financial conditions are supportive of growth rather than holding it back. Optimism around AI has lifted equity markets. Some of the largest technology companies have funded their capital investments at favorable interest rates and attractive credit spreads. I mainly hear about plans for business investment, not that credit markets or interest rates are holding companies back, telling me that policy may not be restrictive. And rising inflation means the real Fed funds rate has actually declined over the last few months. In the labor market, the incoming data point to resilience and stability. The unemployment rate was 4.3% in April, similar to where it was last summer. This is right around my definition of full employment in the long term when labor demand and supply are in balance. Claims for unemployment insurance and notice of mass layoffs remain low, providing no signal of an impending slowdown. By contrast, the picture for inflation is not encouraging. Inflation is too high and is moving higher. Headline PCE was 3.8% in April, well above our 2% objective. Rising gasoline prices has been one factor pushing up inflation recently, but I see many forces at play. Core PCE inflation, which excludes volatile food and energy prices, was 3.3% in April, well above our objective and well above levels from six months or a year ago. Looking within the components of core inflation, I see relatively broad-based price pressures across goods and non-housing services. Inflation among services excluding housing has been stuck at an elevated rate and has shown little improvement over the last two years. Even though these prices should be less impacted by tariffs and energy prices than other components, this ongoing stretch of high inflation continues to impose costs on consumers. Conversations with community contacts point to growing struggles with paying rent, especially among senior citizens as prices have continued to rise for many daily necessities. From my conversations in Erie, the overall sentiment was that consumers were expecting prices to keep going up. One woman shared that she felt like everyone is feeling a genuine sense of despair. Even more concerning is that no one in that room thought things would get better in the next six months or even the next couple of years. Because monetary policy affects the economy with a delay, it's important to be forward-looking when setting interest rates. So, I must account for not only conditions today, but for the likely path of the economy. Among the many factors I'm watching are the future path of oil prices and inflation, the resilience of spending, stabilization in employment, and evolving conditions in financial markets. Elevated uncertainty around the economic outlook means there's elevated uncertainty around the path for monetary policy. Given the uncertainties, it's helpful to think through different scenarios. Under one scenario, it's possible that an extended period of high oil prices and supply chain pressures will boost inflation while eventually weighing on growth and the labor market. Business and community contacts report that the jump in gasoline prices is already straining budgets for lower income individuals. Higher tax refunds have helped support overall consumer spending so far, but those savings could be spent down. In this case, policy could remain on hold for some time to balance weaker prospects for the labor market with elevated inflation. Alternatively, a sharper downturn in spending and the labor market could warrant a more accommodative stance of policy, although I see this as less likely. But other outcomes are also plausible. There's a growing risk that inflation could remain elevated if energy costs do not come down quickly and if businesses feel that they have no choice but to raise prices. I've heard from business leaders whose companies are exposed to oil and other commodities affected by the conflict with Iran that they have already seen multiple rounds of large price increases. This is not the only upside risk to inflation. The economy faces ongoing cost pressures in other areas as well, ranging from electricity to health insurance to software. These broad-based pressures could continue to push up prices, especially if growth and the labor market remain resilient. If inflation persists at an elevated rate, then more restrictive monetary policy could well be needed to bring inflation back to 2% in a timely fashion. And there's an additional risk from inflation that bears watching. With the economy now in its sixth year of elevated inflation, consumers, businesses, and financial markets may start to build in expectations for higher future inflation. This would be a bad development. Preventing an inflationary mindset is critical to delivering on our 2% objective. Increases in inflation expectations that threaten our goal warrant taking decisive action. For today, it's reasonable to keep rates steady given the uncertainties around the economic outlook. But if recent trends continue, it may soon be appropriate to act. Based on the data, I'm more concerned about the growing risks of persistently elevated inflation than the risk to full employment and that monetary policy may not be sufficiently restrictive to bring inflation down to 2%. If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments at greater cost. Okay, so let me close by coming back to our 1988 earworm of a song. It Takes Two. 2% inflation helps us achieve maximum employment and price stability in the long run. Or as Rob Base and DJ E-Z Rock may have put it, it takes 2% inflation to make the economy go right and it takes 2% inflation to make it out of sight. Thank you and I look forward to our discussion.

I'm great. I'm great. The weather is spectacular.

And the midges are not too bad.

That's right. Yeah.

I think every job has its challenges. As I say to people all the time because when I'm out in the community or even, you know, in my building around town, people ask me, 'How are you doing? How are you doing?' And I say every organization has its series of challenges of pros and cons of, you know, internal discussions and conversations. It just happens that mine are playing out on the front page of the paper every day. Stress is kind of what you make of it. In my former life I was a market maker and so I went home with big piles of risk every night and you had to worry about would the markets move one way or another and you just learn to adapt to things. I mean, I look at the baristas at Starbucks who've got that line of people around the corner. That's stressful. So, there's stress at every place that you have it. And for me, it's about finding a community, finding people who are supportive and, hopefully an environment where you can have open conversations and discussions. And that helps to bring us to the right answers.

I'm looking at a couple things. Inflation expectations is certainly one of them and I talked about that a bit in the speech. If we see inflation expectations starting to migrate away from that 2% objective, that's a signal that this inflationary mindset might be setting in. I'm not seeing signs of that right now, but it's something that I'm watching closely amongst other factors.

Everybody. Yeah. All of those consumers, businesses, investors, all of those factors. And so we look at it, I look at the survey data, there's some market-based data, there's some inflation-linked securities that you can look at where those are trading. And those all add to this picture of is that inflationary mindset coming in. And also, you know, in my travels around the district, when I'm going around and talking to people, what I hear from them is a big factor for me. So that conversation in Erie where you have people who say, 'We don't think this is going to get better anytime soon.' That's something that my ears perk up to. And so I ask that question when I'm going around to other parts of the district as well. Is that just this one group or is that more prevalent? And if it starts to become more prevalent, that's something that would be a concern to me.

That's my perspective. It's not a trend yet.

I observe it. I can't necessarily, you know, look we have a very resilient economy in the US. I think what you see is that businesses have continued to find new ways of working. When I'm talking to businesses I hear about the efficiencies that they're finding. So whether it's we were at a plant up in northwest Ohio last week and, you know, they've been dealing with the tariff impacts and for that business actually the tariffs are a positive and I hear both sides that tariffs are a good thing and a bad thing. We've got a lot of steel production in the district. Tariffs have been a positive for the steel industry. But they've had to find ways of adapting their workforce. They've had to find ways of adapting their pricing strategies to make sure that they can keep up with demand. But our businesses are very resilient and we've seen them continue to do really well. We've got this transformational thing going on in this AI boom and these investments and that's propelling us forward. That's keeping some of the momentum in the economy moving forward. All of those positives are helping to keep employment I think at a reasonable level. Now, the one thing that I'm watching on the employment side is I think we're around my estimate of full employment, but it's a bit of a strange employment market in that we've been stable on the unemployment rate, but we're not creating that many new jobs. We think that's because of the sharp changes we've had in immigration. You don't need to create that many new jobs to keep the unemployment rate stable. But that does pose a challenge to a lot of the businesses, particularly in the fourth district where I hear from people that it's hard to find workers, particularly if they're in the skilled trades or in manufacturing or in construction jobs. Those are hard to find. And so it can be that we're in this place where you don't need to create that many new jobs to keep unemployment pretty stable and the economy is continuing to grow at a pretty healthy clip. But there's also a challenge underlying that with a lack of population growth or maybe less population growth than you might have otherwise in the context of greater immigration. So fewer customers.

I had a conversation with him a few weeks ago. He is approaching the job with a real open mind and I think he's asking a lot of first principles questions, which is a great thing to do. One of my favorite things about the role is that we do really deep analysis. We do really thorough reviews of big important questions because the decisions that we make are really impactful decisions and so we need to make sure that if we're changing things, the way we approach things, that we've done it with due consideration. And I think that he's coming in asking some of those big picture questions: what's working well, where can we do better, how do we help support our goals of maximum employment and price stability, and how do we really do that to serve the public. And so I think he is a public servant who will come in with an open mind and try to do his best.

So I look at a lot of different measures of inflation as I talked about in the speech. Our preferred measure, the one that we've held ourselves accountable to, is the Personal Consumption Expenditures price index. So that's one of the numbers that's related to GDP. It's a specific index, but there are a number of other ways. There's a consumer price index, there's a producer price index, you can look at it in headline, which means it includes everything, or you can look at it in core, which usually takes out the volatile food and energy prices. What the incoming chair talked about in his testimony or his hearing in front of Congress was that he's looking at what are called trimmed means or median inflation. Now in Cleveland, we actually, I don't know if we pioneered this, but we were one of the earliest who put forward one of these indices and in the 90s we put forward a trimmed mean inflation. So what that means is rather than taking out the food and energy, we're taking out the things at the way top and the things at the way bottom. What you're looking for in this is you're trying to get a better sense of what is that middle bucket doing and how is that trending over time. So again, because I care about where the economy is today, but also where it's going to be in the future, sometimes you want to take out these big one-offs. So it could be the oil prices right now could be a big one-off. When there was the avian flu that had a huge impact on egg prices, we couldn't stop hearing about egg prices. And that flowed through in that. So you want to think of there are a number of different ways of trying to get at what is that longer term trend. So some people look at it taking out that food and energy. Some people do it taking out those tails of the super high and super low things. I look at all of these. I don't think we have the luxury of picking just one and staying maniacally focused on it because it could be that you pick the wrong one and then you're making bad decisions. And so you need to really look at the full suite of indices that are out there and take their signals for what it's worth. At times when the economy is shifting, ignoring those tails could mean that you're missing out on some of that bigger picture of what's happening. So like as we talked about, right, if I told you that my weight is amazing, I'm looking really great right now. My diet is perfect except for the donuts I had for breakfast, the fried chicken I'm going to have for dinner, and the ice cream I'll have after that. But other than that, I am totally on track. The ice cream's a total outlier. You're right to ignore it.

So, you have to really think about everything. And for me, our target that we talked about is the full headline number because individuals experience all of it. And so, I care about the core components because they may give me a better sense of the persistence and where inflation's going to go in the future. But I can't ignore that headline experience of everyday Americans who can't afford to buy ice cream because they don't have the extra $3 to buy ice cream and take their kids out for that or they can't go to the store for a treat.

Depends on how you measure it.

So headline PCE 3.8, CPI is a bit lower, but the trimmed mean is closer to 2 and a half. Is that right?

Yeah, we're getting a nod. We're getting a nod. Okay. So that, but that I think those, that difference, you know, of one and a half percent, shows you what the difference in those numbers can be.

Yeah. When you, in the, at the last FOMC meeting, by the way, very exciting that you're now a voting member. The...

I think there was some, there was some applause. I think some applause for that.

Uh-huh.