Fed’s Cook warns rate hike possible

Federal Reserve Governor Lisa Cook said on August 5 that she is prepared to support another interest-rate increase if inflation does not keep slowing, a signal that last week’s decision to hold rates steady may not settle the policy debate for long. Cook said in Anchorage, Alaska, that inflation remains above the Fed’s 2% target and that risks now tilt more to prices than to employment. San Francisco Fed President Mary Daly, in materials for a Tokyo presentation dated August 6, described a second inflation scenario in which price pressures broaden and policy has to be recalibrated more aggressively. Together, the remarks showed two officials arguing that the bar for renewed tightening has not disappeared. ### Why did Cook say a hike is still on the table? Lisa Cook said in Anchorage that “inflation is too high” and that she views the inflation side of the Fed’s dual mandate as carrying greater risk than the employment side right now. She said she is “prepared to act by raising rates, if necessary,” and added that she would need to see signs of continued disinflation soon. Cook said the June inflation data improved modestly, but she cautioned against putting too much weight on one month’s reading in what she called a highly uncertain environment. (federalreserve.gov) In her speech, she said the personal consumption expenditures price index rose 3.7% in the 12 months through June and core prices rose 3.3%, both still above the Fed’s target. ### What changed after the Fed held rates steady last week? (federalreserve.gov) CNBC reported that Cook was part of a 9-3 majority last week that kept the federal funds rate in a 3.5% to 3.75% range. She said that vote reflected a desire to assess how tariffs, an energy supply shock tied to the Middle East conflict and spending linked to artificial-intelligence buildouts were affecting prices. (federalreserve.gov) Cook said those forces have shifted the balance of risks toward inflation and away from the labor market. In her Fed speech, she said elevated energy prices had contributed significantly to inflation over the past year and that AI-related capital spending had lifted prices for semiconductors, software, utilities and other equipment. ### What was Mary Daly warning about? Mary Daly’s August 6 presentation for an ESRI conference in Tokyo laid out two inflation paths. (cnbc.com) In one, shocks fade and mildly restrictive policy gradually returns inflation to the 2% goal. In the other, overlapping shocks compound, inflation broadens and becomes more persistent, and policy “must be recalibrated” to bring inflation down. (federalreserve.gov) Daly’s slides said that second scenario was possible even though many forecasters still expected a shorter-lived inflation pickup. The presentation also said the Federal Open Market Committee faces “bimodal risk and considerable uncertainty,” and that if inflation is gaining momentum, “aggressive policy recalibration is likely required.” ### How far is inflation from the Fed’s target and projections? (frbsf.org) The Federal Reserve’s July 2026 Monetary Policy Report said the median projection submitted at the June 16-17 meeting showed PCE inflation at 3.6% for 2026, down to 2.3% in 2027 and 2.0% in 2028. The same projections showed core PCE inflation at 3.3% in 2026 and the median projected federal funds rate at 3.8% this year. (frbsf.org) Cook’s August 5 speech used the latest available June reading of 3.7% for headline PCE inflation, underscoring why some officials are not yet ready to assume price pressures will ease on their own. She said five years of above-target inflation increase the risk that higher inflation becomes embedded in price- and wage-setting behavior. ### What are markets and borrowers watching next? (federalreserve.gov) CNBC reported that markets were looking to the possibility of a move as soon as September, though pricing showed higher odds for October, according to CME Group’s FedWatch. Cook said policymakers do not have the luxury of waiting if disinflation fails to resume, a comment that puts added weight on the next inflation readings before the Fed’s next decisions. (federalreserve.gov) The next major markers are the incoming inflation data and the Federal Reserve’s September policy meeting, where officials including Cook and Daly will have to decide whether the recent hold remains appropriate. (cnbc.com)