Fed governor Cook warns of hike

Federal Reserve Governor Lisa Cook said on August 5 that she is prepared to support a rate increase if inflation does not begin to ease, adding a hawkish note to a policy outlook that markets are still struggling to price. Cook spoke after the Fed last week voted 9-3 to hold its benchmark rate at 3.5% to 3.75%, a decision that already exposed an unusual degree of internal disagreement. Her comments came as investors weighed mixed signals from energy prices, labor-market data and currency moves ahead of the central bank’s September meeting. Chase strategists said this week they now expect a 25-basis-point increase next month, while other market indicators have pointed to softer odds of a hike. ### What exactly did Cook say? Lisa Cook said in remarks delivered in Anchorage, Alaska, that inflation is still too high and that she is “prepared to act by raising rates, if necessary,” if price pressures fail to cool. Reuters and CNBC both reported that Cook said risks tied to inflation currently outweigh risks tied to the employment side of the Fed’s mandate. (cnbc.com) Wednesday’s remarks did not amount to a policy commitment. Cook also said disinflationary forces may still push inflation toward the Fed’s 2% target without another increase, according to Dow Jones coverage carried by Morningstar. ### Why did her comments stand out after last week’s meeting? (cnbc.com) Last week’s Federal Open Market Committee decision kept the target range at 3.5% to 3.75%, but the 9-3 vote showed that three policymakers favored an immediate quarter-point increase, according to CNBC and Chase’s market note. That left investors looking for clues about whether more officials might shift toward the hawkish side before September. (morningstar.com) Bloomberg reported separately on August 6 that San Francisco Fed President Mary Daly also backed the hold decision but warned that inflation risks could require more aggressive action. Her comments reinforced the message that some officials are not ruling out another move if incoming price data stay firm. (cnbc.com) ### Why are markets split on September? Chase said on August 5 that its strategists now expect a 25-basis-point increase at the September meeting, citing Iran-related supply disruptions, elevated energy costs and investor doubts about the Fed’s inflation credibility after July’s hold. The bank said those factors had lowered the bar for another tightening step. (bloomberg.com) Other signals have pointed the other way. MarketScreener reported that the Indian rupee’s rally was being supported by ebbing expectations of a September Fed hike and softer oil prices, showing that some investors think pressure for another increase may be easing. ### What role is the labor market playing? (chase.com) July employment data have not resolved the debate. Mortgage Professional said weak private hiring had unsettled mortgage-rate expectations without settling the case for a September increase, underscoring how labor-market softness is complicating the inflation story. (forbes.com) CNBC reported earlier in late July that investors had been increasing bets on a September hike as oil prices climbed during U.S.-Iran fighting. That means traders are still balancing two competing risks: persistent inflation tied in part to energy and signs that growth or hiring could be losing momentum. ### What comes next before the Fed decides? (mpamag.com) September is now the focal point for markets because that is the next Fed meeting at which policymakers could change rates. Investors will be watching incoming inflation readings, labor-market reports and energy prices to judge whether Cook’s warning develops into a broader committee shift. (cnbc.com) Bank strategists, futures traders and mortgage markets are all likely to keep repricing the odds in the weeks ahead. For now, Cook has made clear that a hold in July did not close the door on a hike in September. (cnbc.com)