Three Federal Reserve officials who dissented against Wednesday’s decision to hold interest rates steady warned that waiting too long to act against inflation could risk the need for even more aggressive policy moves later.“The longer that high inflation persists, the more challenging and costly it can be to bring it back down,” Cleveland Fed President Beth Hammack said in a statement released Friday. Minneapolis Fed President Neel Kashkari said in a separate statement that to manage against the risk of high inflation becoming entrenched, he “would rather tighten policy incrementally as we gather more data on the path of inflation and employment.” Lorie Logan, head of the Dallas Fed, said in a statement released later Friday that “modest action in the near term would reduce the likelihood of needing to take sharper action later.”Fed officials voted 9-3 this week to leave their benchmark rate unchanged for the fifth consecutive meeting. Policymakers have held their target rate in a range of 3.5% to 3.75% all year. But more officials have expressed support for potential rate increases after renewed tensions in the Middle East and a massive investment boom driven by artificial intelligence have revived inflationary pressures. Treasuries fell after the comments from Hammack, Kashkari and Logan, as oil prices climbed. Yields on two- to five-year notes retraced much of the declines spurred by Wednesday’s Fed decision. The 10-year yield topped 4.73% for the first time since January 2025, while the 30-year exceeded 5.25% for the first time since 2007.Initially led by short-dated tenors most sensitive to expectations for Fed policy, the declines migrated to longer maturities that are more responsive to the long-term inflation outlook. “Investors think that inflation has been high for a while, and they require a higher premium at the long end,” said Monty Gandhi, an interest-rate strategist at SMBC Group. Bond traders are also paying the highest premiums since March to protect against a further climb in longer-dated yields.In their statements, the three dissenters — who all would have preferred to raise rates this week — pointed to the various supply shocks helping drive up inflation. Hammack said she sees pressure on the demand side of economy as well. Kashkari said that the Fed’s tools can be successful in fighting inflation driven by “successive supply shocks,” as they were in the late 1970s and early 1980s. Logan argued that inflation “appears to be trending toward the mid-2’s, not all the way to 2%” — the rate Fed officials target — even after accounting for the supply shocks and gains in productivity. She said the labor market, spending and financial market conditions suggested policy was not restraining the economy and it was unlikely price pressures would fully cool without some action from the Fed. All three officials noted that the economy overall is strong right now. Inflation PressureThe Fed’s preferred inflation measure, the personal consumption expenditures index, fell 0.1% in June, data released Thursday showed. A report earlier this month showed a similar decline in another inflation measure, driven by large declines in gasoline prices. Now, economists warn the inflation relief seen earlier this summer may be short lived after a re-escalation of the Iran war pushed oil prices up again in July.Hammack said she did not see policy as “appropriately restrictive” to cool price pressures, and was not confident inflation would return to the Fed’s 2% goal on its own.“Now is the time for the FOMC to act to speed the return of PCE inflation to our 2% objective and deliver on our commitment to price stability for the American people,” she said.The same three regional bank presidents dissented at the Fed’s April meeting. While they supported the decision to hold interest rates then, they objected to language in the post-meeting statement that suggested the next rate move would likely be a cut. In an interview in late June, Kashkari cited what he saw as broad inflationary pressure as a reason the Fed would likely need to raise rates this year. He joined eight of his colleagues at last month’s meeting in penciling in at least one hike this year. On Friday, he said using small adjustments could give the Fed more flexibility to respond to shifts in the economy. “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,” Kashkari said, adding that officials could “slow or pause subsequent adjustments” if inflation fades. The three leaders also noted that inflation has been above their goal for more than five years. “Every month of above-target inflation compounds the strain on the budgets of American families and businesses,” Logan warned.Investors mostly expected the Fed to leave rates stable at the July 28-29 meeting. But bond markets sold off Wednesday and yields on 30-year Treasury bonds rose to the highest levels in 19 years after Fed Chairman Kevin Warsh declined to explain officials’ rationale for the decision and didn’t offer guidance on what it would take for policymakers to adjust rates. Richmond Fed President Tom Barkin said Friday it was a “close call” on whether the Fed’s benchmark rate is high enough to bring down inflation. Barkin, who will vote on monetary policy decisions next year, told The Wall Street Journal he saw a case for undoing some of the rate reductions made last year, but he was not sure if he would have joined his peers in dissenting this week. “Do you have to add some restraint? I think that’s the question,” he said.Data out Friday showed US labor cost growth remained steady in the second quarter, indicating the job market is doing little to contribute to inflationary pressures.While the difference was small, “the market needs lower inflation data, and not slightly higher,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group.Saraiva, Marte and Stanton write for Bloomberg.
