Fed rates dissenters make their case for higher rates

Inflation has been too high for too long, and the Federal Reserve should not count on it fading without further action.

• That is the argument from the three Fed officials who dissented from the decision led by chairman Kevin Warsh to leave interest rates unchanged this week, preferring instead to raise them.

Why it matters: Together, the dissents lay out a blueprint for the Fed's hawkish wing, arguing that repeated supply shocks paired with resilient demand have made inflation too persistent to fade on its own without tighter monetary policy.

• The question in the months ahead is whether that argument persuades more policymakers, especially if inflation remains stubborn.
• It is worth watching whether they turn out to have momentum persuading other voting members of the Fed's policy committee in the weeks ahead.

What they're saying: "I increasingly believe that monetary policy does have an important role to play in addressing a series of successive supply shocks that might lead to entrenched higher inflation," Minneapolis Fed president Neel Kashkari said in a statement Friday morning.

• In a separate statement, Cleveland Fed President Beth Hammack said she is "not confident" that inflation will return to the Fed's 2% target on its own.

The big picture: The three dissenters broke with the majority by voting for a quarter-point rate increase. They emphasized different concerns but reached the same conclusion: Rates are not holding back the economy enough to bring down inflation.

• "Labor, consumption and financial market conditions indicate that monetary policy is not restraining the economy," Dallas Fed president Lorie Logan wrote in a statement. "Without any policy restraint, inflation will likely continue to trend above target until there's an unanticipated shock."

Between the lines: Kashkari said the Fed should usually look through temporary supply shocks.

• But he said that after years of disruptions — from the pandemic and Ukraine to tariffs and the Middle East conflict — inflation risks becoming entrenched.
• Kashkari invoked a parallel to the 1970s as a reminder that successive shocks can ultimately require tighter policy.

Zoom in: Kashkari pointed to one additional factor — the "massive investment in data centers," which he said has added a new demand element to the inflation outlook.

• Hammack said she was seeing "inflationary pressures coming from the demand side of the economy, as well."
• Businesses across the Cleveland Fed district told Hammack that pricing pressures are broadening rather than fading, while consumers are "expressing despair over persistently higher prices."
• "A higher federal funds rate would help restrain economic activity and reduce inflationary pressures," Hammack said.

What to watch: The officials are not calling for an aggressive tightening campaign. Instead, they said small moves now while the labor market remains healthy would reduce the risk of larger moves later.

• "[A] potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," Kashkari wrote.
• "Modest action in the near term would reduce the likelihood of needing to take sharper action later," Logan wrote.

The bottom line: The coming months will determine whether these arguments become the consensus inside the Warsh Fed.