MNI: Logan Says Fed Is Well Positioned To Hold Tight On Rates

Federal Reserve Bank of Dallas President Lorie Logan said Tuesday U.S. monetary policy is well positioned to hold tight for some time at modestly restrictive levels, but noted a potential scenario of softer inflation and a weakening labor market calling for lower rates fairly soon. 

Stressing the importance of making decisions for the long run and the Fed's monetary policy independence, Logan said in prepared remarks that the Fed’s long-term focus shapes her thinking about monetary policy at the current juncture.

The U.S. economy has been quite stable over the past year despite substantial shifts in domestic policies and geopolitics, Logan said. "While tariff increases have left only a modest imprint on inflation so far, they appear likely to create additional pressure for some time. Inventories and fixed-price contracts have helped some companies temporarily hold the line, but higher tariffs will need to be priced in when contracts renew and inventories run out."

"My base case is that we’ll need to keep interest rates modestly restrictive for some time to complete the work of returning inflation sustainably to the 2% target. But it’s also possible that some combination of softer inflation and a weakening labor market will call for lower rates fairly soon," she said.

UNANTICIPATED SHOCKS

Consumer Price Index data through June suggest PCE inflation will probably move up a bit on a 12-month basis, Logan said. Meanwhile, the labor market remains solid. "Job openings, quits and businesses’ hiring and firing rates have also been moving sideways," she added. (See: MNI INTERVIEW: Bostic Backs Go-Slow On Rates As Tariffs Linger) 

"Tariffs on intermediate goods, such as parts used to assemble new cars, take time to show up in the prices of finished products. And some retailers are waiting to raise prices until they see where tariff rates settle," Logan said at a World Affairs Council of San Antonio event. (See: MNI INTERVIEW: Fed's Daly: Time To Think About Adjusting Rates) 

However, Logan also pointed to a number of risks, including less persistent inflation, a cooling labor market, lower hiring rates, a slower housing market, pessimistic consumer sentiment and heightened geopolitical risks. 

"Any number of unanticipated shocks could throw the economy off course. Outcomes along any of these lines could shift the inflation and employment outlook and call for reducing interest rates sooner than in my base case," Logan said.