Federal Reserve Governor Lisa Cook said on Wednesday that she is prepared to support raising the central bank's benchmark interest rate if inflation does not resume its downward trend, warning that the Fed is running out of room to keep waiting for price pressures to ease on their own.

Speaking in prepared remarks to the 2026 Economic Luncheon of the Anchorage Economic Development Corporation, Cook said the risks tied to inflation currently outweigh the risks to the labour market. She indicated she would back a rate hike "if it becomes necessary" to restore price stability, though she stressed that such an outcome is not guaranteed and that inflation may still cool without further tightening.

Cook argued the Fed has limited room left to wait, given how long inflation has run above the central bank's 2 percent target. She warned that a persistent overshoot risks becoming locked into wage and price-setting behaviour—a dynamic she said would be far harder to unwind later. The 2 percent target, formalised by the Fed in 2012, serves as the anchor for household and business expectations about future costs, and sustained misses risk eroding the credibility the central bank has built around that commitment.

Even so, Cook pointed to tariffs, the conflict in the Middle East, and heavy investment tied to artificial intelligence as forces that could still ease price pressures without additional rate action, tempering the immediate hawkish read of her remarks.

Her comments follow last week's Federal Open Market Committee decision to hold the federal funds rate in a range of 3.5 to 3.75 percent, a call that drew three dissenting votes from officials who favoured an immediate increase. Three dissents at a single FOMC meeting are notable; in recent decades, most meetings have seen at most one or two. Cook was among the majority who backed the pause, saying it was appropriate to see how inflation trends evolve before acting further.

Cook is not alone in flagging a more hawkish stance. New York Fed President John Williams and Philadelphia Fed President Anna Paulson have both signalled willingness to raise rates if conditions warrant, adding to a more divided tone among policymakers. Fed Chairman Kevin Warsh, by contrast, has offered little public guidance on the likely path for rates.

Cook also addressed the labour market and consumer sentiment, saying job conditions have held up and that predictions of significant AI-driven job losses have not yet materialised, though she cautioned that risks remain. She linked weak consumer sentiment partly to persistently high inflation, underscoring the stakes for the Fed as it weighs its next move.

With three dissenting votes already on record favouring a hike, markets may start pricing higher odds of a rate increase at the next meeting, particularly if upcoming inflation prints disappoint. The dollar and short-term yields are the most likely near-term movers on this kind of commentary, while equities could face pressure if the narrative of an increasingly divided, inflation-focused Fed takes hold.

The next FOMC meeting is scheduled for mid-September, giving policymakers additional inflation, employment, and growth data to weigh before deciding whether to resume tightening or hold again.

Source: ForexLive