MNI: Fed’s Logan Says More Restrictive Policy Is Needed

The Federal Reserve needs to tighten monetary policy further in order to bring down an inflation rate that remains far too high and persistent, Dallas Fed President Lorie Logan said Thursday.

“I remain very concerned about whether inflation will return to target in a sustainable and timely way. And I think more-restrictive monetary policy will be needed to achieve the Federal Open Market Committee’s goals of stable prices and maximum employment,” she said in prepared remarks to the Central Bank Research Association’s annual conference.

“It is important for the FOMC to follow through on the signal we sent in June. Two-thirds of FOMC participants projected at least two more rate increases this year," she said. "To have confidence that inflation will return to target on an appropriate timetable, we need to see more than some continued very modest rebalancing."

Logan said both inflation and job market data proved stronger than expected in the first half of 2023, pointing to a core PCE reading of 4.7% in the first quarter.

“While the final data for the second quarter aren’t in yet, it was clearly pretty hot, too. Core and trimmed mean inflation measures continued to run around 4% percent—twice our target,” she said. “Statistics like these that filter out especially volatile prices give an important signal of where overall inflation is headed. And while labor market indicators have eased, the overall pace of rebalancing remains slower than previously expected.”

Minutes from the Fed’s June meeting showed that some officials wanted to hike rates last month despite the committee’s ultimate decision to keep them steady. Logan was one of them.

WANTED TO HIKE IN JUNE

“In my view, it would have been entirely appropriate to raise the federal funds target range at the FOMC’s June meeting, consistent with the data we had seen in recent months and the Fed’s dual-mandate goals. But in casting my vote, I was mindful of several factors. In a challenging and uncertain environment, it can make sense to skip a meeting and move more gradually,” she said.

Wage growth is running at about 4.5-5% and that Dallas Fed business survey respondents expect it to remain around 5% over the next year, she said, similar to what they expected at the end of last year.

Logan downplayed the notion that the lags of monetary policy means there is still a lot of tightening to come from past rate increases.

“Some people say a lot of further cooling is in store from lagged consequences of the rate increases the FOMC has already made over the past year and a half. I’m skeptical about the potential for large additional effects from this channel,” she said.

She noted that housing was already showing signs of bottoming out, a potential concern since Fed officials are counting on softer home prices to help bring down inflation.

“While housing inflation will likely continue to soften in the near term as a result of progress on rents last year, a rebound in housing would pose an upside risk to inflation down the road,” Logan said.

Concerns about banking stress and financial stability are valid but should not alter the course of monetary policy, she added.