Why Some Fed Leaders Want to Raise Interest Rates

Three leaders at the Federal Reserve — the group that controls U.S. interest rates — said this week that the Fed should raise rates soon. They disagreed with the Fed's decision on Wednesday to keep rates the same. These three officials warned that waiting too long to act against rising prices could make the problem much harder to fix later.

The three officials are Beth Hammack of the Cleveland Fed, Neel Kashkari of the Minneapolis Fed, and Lorie Logan of the Dallas Fed. All three voted against the majority at this week's Fed meeting. The full group of Fed officials voted 9 to 3 to leave their benchmark, or main, interest rate unchanged for the fifth meeting in a row.

Hammack said she believes it is time for the Fed to act. "The longer that high inflation persists, the more challenging and costly it can be to bring it back down," she said in a statement on Friday. She does not think the current interest rate is high enough to cool rising prices on its own.

Kashkari said he would rather make small, steady increases to interest rates than wait and be forced to make one very large increase later. He said using small adjustments could give the Fed more flexibility. "If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," he said.

Logan warned that inflation seems to be heading toward around 2.5%, not down to the Fed's goal of 2%. She said the economy does not appear to be slowing down enough on its own. She also noted that "Every month of above-target inflation compounds the strain on the budgets of American families and businesses."

All three officials also pointed out that inflation has been above the Fed's goal for more than five years. They said there are many reasons prices keep rising, including supply shocks — sudden events that make goods harder to produce or ship. New tensions in the Middle East and a big boom in spending on artificial intelligence technology have both pushed prices higher recently.

The Fed's favorite tool for measuring inflation is called the personal consumption expenditures index, or PCE. Data released Thursday showed that this measure fell slightly in June. But economists warn that the relief may not last, because oil prices have started rising again after new conflict involving Iran broke out in July.

When the three officials spoke on Friday, bond markets reacted quickly. Bond yields — the return investors earn from lending money to the government — rose sharply. The yield on 30-year U.S. Treasury bonds hit its highest level since 2007. This tells us that investors expect interest rates and inflation to stay high for a longer time.

Another Fed official, Tom Barkin of the Richmond Fed, said Friday it was a "close call" on whether the current rate is high enough. He said he saw a reason to possibly undo some of the rate cuts made last year, but he was not sure he would have voted to raise rates this week. He will get a vote on Fed decisions starting next year.

Jobs data released Friday showed that worker pay grew at a steady pace in the spring. This means that wages are not adding much extra pressure to inflation right now. Even so, experts say the Fed needs to see clearly lower inflation numbers before it can fully relax.