MNI: Fed’s Logan Says ‘More Work’ Might Be Needed On Rates

The Federal Reserve could well need to tighten monetary policy further in order to bring U.S. inflation sustainably back to the central bank’s 2% target, although policymakers can now afford to proceed more cautiously, Dallas Fed President Lorie Logan said Thursday.

“We have to ask whether monetary policy is now sufficiently restrictive to return inflation all the way to 2% in a sustainable and timely way or whether the FOMC still needs to do more. My base case is that there is work left to do,” she said, arguing that recent inflation readings are encouraging but still not good enough.

“These numbers indicate it is too soon to confidently say inflation will trend to 2% in a timely way. Labor market conditions also suggest we haven’t finished the job of restoring price stability.” (See MNI INTERVIEW: Labor Market Gradually Cooling - Fed’s Dvorkin)

Still, Logan struck an arguably less hawkish tone than in the past, saying the Fed doesn’t need to remain hyper aggressive all the way to 2% inflation before taking a breather and seeing what effects its policies are having.

“I’m not yet convinced that we’ve extinguished excess inflation. But in today’s complex economic environment, returning inflation to 2% will require a carefully calibrated approach — not endless buckets of cold water,” she said.

“Tighter financial conditions might slow the economy without much further action by the FOMC. And there are risks to doing both too little and too much.”

YIELD SPIKE DOING FED'S JOB

In addition, a recent spike in long-term Treasury yields to their highest levels in 16 years is doing some of the Fed’s work for it.

“That means households and businesses face more-restrictive financial conditions for the same setting of the federal funds rate. To the extent that tighter conditions from this source persist, they should slow the economy and, potentially, require less additional tightening of monetary policy,” Logan said.

At the same time, she was clearly open to raising interest rates further if needed.

“Skipping does not imply stopping. In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation,” said Logan, who previously ran the New York Fed’s Open Market Trading Desk.