MNI: Fed Should Proceed Cautiously Toward Neutral Rate - Logan
MNI (WASHINGTON) - Federal Reserve Bank of Dallas President Lorie Logan on Wednesday said the central bank will most likely need more rate cuts to finish the journey to sustainably deliver both maximum employment and stable prices, but it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.
The FOMC "has made a great deal of progress bringing down inflation and restoring balance to the economy," she said in prepared remarks noting her support for recent interest rates cuts. "But as the economy nears the harbor, it becomes more important to understand just how deep the water is. And with less room to maneuver, monetary policymakers need to be more prepared for winds and waves that could push us off course. Just like a ship captain, I think it behooves us to proceed cautiously at this point."
Economic activity is strong, inflation is coming down and the economy is approaching a point that can sustainably deliver both maximum employment and stable prices, she said. "Progress on inflation has been broad based" but at the same time the Dallas Fed's Trimmed Mean PCE inflation rate at 2.65% in September "suggests we’re not quite back to price stability yet."
Logan's "base case is that the labor market is close to balanced and stable or cooling gradually."
NEUTRAL RISKS
Yet risks remain that could buffet the economy, and Logan pointed to three that pose the largest potential challenges for monetary policy in the months ahead.
First, unexpectedly strong demand or negative supply shocks could keep inflation above the Fed's target. Second, tightening financial conditions could trigger a rapid deterioration in the labor market. And lastly, financial conditions could ease too much if the neutral interest rate proves to be higher than expected.
"A strategy of repeatedly lowering the fed funds target range toward a more neutral level relies on confidence that the neutral level is materially lower than where rates are now," she said at a conference hosted by the Dallas and Kansas City Feds. "When I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now."
"When policymakers look at midrange estimates that suggest there’s meaningful room to cut before reaching neutral, I think we should recall the technique of a ship captain whose depth finder might mistake mud for water," Logan said. "If we cut too far, past neutral, inflation could reaccelerate and the FOMC could need to reverse direction. In these uncertain but potentially very shallow waters, I believe it’s best to proceed with caution."