Chief cites inflation concerns and potential for a higher neutral interest rate
Lorie Logan, president of the Federal Reserve Bank of Dallas, has warned that it’s premature to consider lowering interest rates.
Logan, whose comments are closely watched by investors given her prior role managing the central bank’s asset portfolio at the New York Fed, said she’s increasingly concerned that inflation progress could stall.
In a speech at Duke University, she cited recent high inflation data and the possibility that current borrowing costs aren’t restraining the economy as much as expected.
“In light of these risks, I believe it’s much too soon to think about cutting interest rates,” Logan said. “I will need to see more of the uncertainty resolved about which economic path we’re on.”
Fed officials, she added, “should remain prepared to respond appropriately if inflation stops falling.”
Fed Governor Michelle Bowman echoed concerns about potential upside risks to inflation, reiterating that while price pressures are expected to lessen, it’s not yet time to lower interest rates.
Labor market strength vs. inflation focus
Logan’s remarks indicate she’s likely among the policymakers who expect two or fewer rate cuts in 2024. Despite the recent strong jobs report, which showed a payroll surge and a decline in the unemployment rate, Logan emphasized the importance of prioritizing inflation data when assessing economic conditions.
“To be clear, the key risk is not that inflation might rise — though monetary policymakers must always remain on guard against that outcome — but rather that inflation will stall out and fail to follow the forecast path all the way back to 2% in a timely way,” Logan said.
Neutral rate concerns
Logan also raised concerns that the neutral interest rate – the level that neither stimulates nor slows the economy – may be higher than anticipated. This could mean that current borrowing costs are not as restrictive as expected, reducing the need for significant rate cuts.
“Economic and financial evidence is accumulating that the long-run neutral rate has likely moved up,” Logan said.
Fed Governor Bowman also flagged the possibility of a higher neutral rate than before the pandemic.
“If that is the case, fewer rate cuts will eventually be appropriate to return our monetary policy stance to a neutral level,” Bowman added.
Balance sheet adjustments
Logan also reiterated that the central bank may soon slow down the pace of reducing its balance sheet. This would likely involve lowering the cap on how much Treasury securities it allows to mature each month while maintaining the cap for mortgage-backed securities. This signals the Fed’s intent to move towards a primarily Treasury-based portfolio.
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“I don’t think we should really move the mortgage cap because keeping it there sends that signal that we are headed toward a primarily Treasury portfolio,” she said. “So my sense is that what we’re talking about is reducing the Treasury cap and slowing the pace of the Treasury runoff.”
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