MNI: Fed's Logan Wants 25bp Hikes Until Inflation Headed to 2%

The Federal Reserve should raise the fed funds rate in 25bp increments until inflation data improve and labor demand and supply become better balanced, Dallas Fed President Lorie Logan said Wednesday, urging policymakers to stay flexible, including restarting rate hikes if necessary after pausing.

Tightening too little and failing to keep inflation in check is the "most important risk" facing the Fed, she said, urging the FOMC to stay focused on bringing inflation back to target in a timely manner.

"My own view is that we will likely need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2% target in a sustainable and timely way," she said in remarks prepared for the McCombs School of Business at the University of Texas at Austin.

"Even after we have enough evidence to pause rate increases, we’ll need to remain flexible and raise rates further if changes in the economic outlook or financial conditions call for it," she said.

SLOWER PACE

The current "complex economic and financial environment" calls for a slower pace of tightening, Logan argued. "That’s why I supported the FOMC’s decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting."

The decision to slow down is not dependent on data. It's "just a way to ensure we make the best possible decisions," she said.

She also urged the FOMC not to lock in a peak rate, emphasizing instead that they continually assess the data. It's uncertain how rapidly the economy will respond to tighter monetary policy, or whether labor supply or productivity will unexpectedly increase and allow inflation to fall without slowing the economy.

"Financial conditions could ease or tighten for reasons unrelated to U.S. economic developments and monetary policy, and to maintain appropriate conditions to achieve our policy goals, it might be necessary to respond with a different policy path."

FINANCIAL CONDITIONS

Logan said she will be watching for "some further and sustained improvement" in inflation and "a clear change in the underlying factors — like the imbalance of aggregate supply and demand and resulting very tight labor market — that have been producing high inflation."

The economy should evolve "more or less as forecasts predict," while financial conditions will need to stay sufficiently restrictive to return inflation to 2%, she said.

"A slower pace could reduce near-term interest rate uncertainty, which would mechanically ease financial conditions. But if that happens, we can offset the effect by gradually raising rates to a higher level than previously expected."