Federal Reserve Bank of Dallas President Lorie Logan said the central bank must continue raising interest rates to fully cool inflation and suggested that rising Treasury yields may also help slow the economy.
“I currently estimate the target range needs to rise an additional 50 basis points or more to appropriately balance the outlook and risks for our dual mandate goals,” Logan said Thursday in prepared remarks for an event at the Dallas Fed.
Logan, who before joining the Dallas Fed spent more than two decades on the New York Fed's markets desk, also noted the run up in US Treasury yields over the past few weeks. She said market participants have told her that started with expectations of strong growth and a higher neutral rate for the Fed, but models now show that term premiums — the extra return investors demand to own longer-dated bonds instead of shorter ones — is also rising.
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“Higher term premiums can slow the economy, reducing the need to tighten monetary policy,” said Logan, who is a voter this year on the Fed's rate-setting Federal Open Market Committee.
Policymakers raised interest rates by a quarter percentage point at their September meeting, the first hike in three years, amid stalled progress on slowing inflation. The median estimate of policymakers at that meeting was for at least one more rate hike this year. Bonds have sold off this year, with 30-year yields up 64 basis points, or .64 percentage point, since June.
Some of Logan's colleagues said this week the central bank can be patient in delivering its next hike. Vice Chair Philip Jefferson and New York Fed President John Williams, who together with Chairman Kevin Warsh are sometimes called the central bank's leadership troika, said the Fed could wait to see how data evolve over the coming weeks before making a decision on policy.
Those comments pared market expectations for a hike at the Fed's Oct. 27-28 meeting. Investors now see just a 28% chance of an increase next month, based on pricing in federal funds futures contracts, compared to 70% odds earlier this week. After this month, Fed officials meet again in December.
Logan, who detailed the different Treasury market models she looks at in a 2023 speech, said she will continue to watch moves in yields and other aspects of the economy to assess what level of interest rates will result in some restraint on the economy.
“At minimum, a few additional increases in the target range would undo the FOMC's risk-management cuts from last fall,” Logan said, referring to the 75 basis points of rate reductions the Fed implemented last year. “But the end goal should be to make policy modestly restrictive and put the economy on a path to sustaining both maximum employment and stable prices.”
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