MNI: Logan Argues For Gradual Fed Cuts, Citing Inflation Risks

MNI (WASHINGTON) - Federal Reserve Bank of Dallas President Lorie Logan said Wednesday she supports "a more gradual" approach to lowering interest rates after the jumbo size cut last month, because inflation could still get stuck above 2%. 

"Following last month’s half-percentage-point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals," she said in remarks prepared for a Houston energy conference. 

"Inflation and the labor market are in striking distance of our goals rather than seriously overheated," she said. "Less-restrictive policy will help avoid cooling the labor market by more than is necessary to bring inflation back to target in a sustainable and timely way." 

INFLATION RISKS

Inflation has fallen significantly since 2022 but recent progress has been more measured, Logan said. 

If aggregate demand proves stronger than forecast and financial conditions loosen, inflation could stay above the Fed's target, she said. Supply chain disruptions, strikes and other geopolitical developments could also have an impact on prices, she said. 

"While the upside risks to inflation have diminished, they have not vanished. I continue to see a meaningful risk that inflation could get stuck above our 2% goal," she said. 

Economic fundamentals, models, surveys and market prices also suggest the neutral rate may be higher than before the
pandemic, meaning the Fed can't be sure if its policy rate falls too far and ends up spurring inflation, she said.  

"These risks suggest the FOMC should not rush to reduce the fed funds target to a 'normal' or 'neutral' level but rather should proceed gradually while monitoring the behavior of financial conditions, consumption, wages and prices," she said. 

"Lowering the policy rate gradually would allow time to judge how restrictive monetary policy may or may not be and reduce the risk of inadvertently boosting inflation by bringing the policy rate below its neutral level." 

LABOR MARKET HEALTHY

On the other half of the Fed's mandate, Logan said the labor market has cooled from unsustainably hot conditions and remains healthy. She attributed the rise in unemployment over the past year mainly to labor force growth and slower hiring rather than more people losing jobs. 

The data have been challenging to read because of large revisions, storms and strikes, she noted.  

"I believe the FOMC can best balance the labor market risks for now by normalizing policy gradually — neither waiting too long to act nor moving too quickly and risking going too far." (See: MNI: Job Boom Means Slower Fed Cuts, Pause Possible - Ex-Staff)