MNI: Fed's Logan Cautious On Cuts Given Still-High Inflation

U.S. inflation is still too high and persistent for the Federal Reserve to comfortably cut interest rates much further, Dallas Fed President Lorie Logan said Tuesday. 

"I will be cautious about further rate cuts," Logan said. "Even setting aside temporary effects of this year’s increases in tariff rates, inflation is not convincingly on track to return all the way to 2%." 

Logan said she is comforted by stable long-run inflation expectations, but added that "policymakers cannot take well-anchored expectations for granted. The longer tariffs take to show through into prices and the longer inflation remains above 2%, the greater the risk that above-target inflation becomes entrenched." (See MNI INTERVIEW: Fed Right To Stay Cautious On Rate Cuts-Kohn)

Logan flagged worries about stubborn inflation in non-housing services as a source of concern, because that sector "should be relatively unaffected by tariffs, yet it has hovered near 3.4% over the past year."

She acknowledged a recent softening in the labor market, though she appeared sanguine about just how much of the decline in payrolls represented a worsening in the outlook versus a trend reflecting lower labor force participation due to immigration restrictions. 

"While payroll gains have slowed considerably, so has labor force growth," she said. Research by my staff shows that a decline in immigration can also reduce demand, which offsets the reduced labor supply and leaves the economy smaller but overall balanced with little effect on inflation."

While she supported the FOMC's quarter point this month, Logan said monetary policy is probably not that far from neutral at this point given strong growth and ebullient financial markets. 

"The combination of persistent inflation, resilient demand and modest labor market slack indicates to me that policy is likely only modestly restrictive. There may be relatively little room to make additional rate cuts without inadvertently moving to an inappropriately accommodative stance," Logan said. 

"The market proxies from TIPS and swaps both suggest expectations for long-run neutral real interest rates that are comparable to model-based estimates and not far from the current policy rate."