Dallas Fed president hints at possibility of rate hike

Dallas Fed President Lori Logan said in a recent statement that the Fed may need to consider raising short-term policy rates again. The move is aimed at stemming a recent decline in long-term bond yields that could lead to another spike in inflation.

Speaking at the American Economic Association meeting in San Antonio, Texas, Ms. Logan expressed concern about maintaining tight financial conditions to maintain progress in lowering inflation. She highlighted the risks of easing financial conditions too early, saying: “If we don’t keep financial conditions tight enough, there’s a risk that inflation will rise again and reverse the progress we’ve made.”

The Federal Reserve (Fed) previously raised its benchmark policy interest rate for all of 2022 and early 2023 in response to high inflation that has reached a 40-year high. But since July last year, the interest rate has remained stable in the range of 5.25%-5.5%. Policymakers said last month they were seeing enough improvement in inflation to potentially end a rate hike cycle and consider a rate cut this year. This forecast has led financial markets to predict significant interest rate cuts in 2023.

Logan’s comments challenged market expectations. She pointed out that while the impact of previous interest rate hikes has largely been taken into account, the decline in the benchmark 10-year Treasury bond yield may trigger an increase in demand and jeopardize the progress made in controlling inflation. “Restrictive financial conditions have played an important role in keeping demand in line with supply and keeping inflation expectations stable,” Logan said.

In October, Logan was one of the first Fed policymakers to argue that rising long-term bond yields effectively supported the Fed’s efforts, which could keep policy rates on hold. However, her current stance reflects a shift in response to recent financial conditions.

Additionally, Logan said it may be time for the Fed to slow down the pace of its balance sheet reduction, signaling a more cautious approach to the pace of asset flight, especially as the balance sheet reverses repurchases near lower lows overnight. situation. The review is part of a broader discussion of the Fed’s monetary policy strategy in the face of changing economic conditions.

Reuters contributed to this article.

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