Fed’s Logan: Rates Must Rise 50 Bps to Tame Inflation

Federal Reserve Bank of Dallas President Lorie Logan stated that the central bank must persist in raising interest rates to effectively curb inflation. She also suggested that the rise in Treasury yields could contribute to slowing economic activity.

“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 remarked on Thursday in prepared comments for a Dallas Fed event.

With over two decades of experience on the New York Fed’s markets desk before joining the Dallas Fed, Logan noted the recent surge in US Treasury yields. She explained that market participants attributed this initially to expectations of robust growth and a higher neutral rate for the Fed. However, models now indicate that term premiums—the additional return investors demand for holding longer-dated bonds over shorter ones—are also on the rise.

“Higher term premiums can slow the economy, reducing the need to tighten monetary policy,” said Logan, who holds a voting position this year on the Fed’s rate-setting Federal Open Market Committee.

At their September meeting, policymakers increased interest rates by a quarter percentage point, marking the first hike in three years amid stalled progress on inflation. The median estimate from that meeting projected at least one more rate hike this year.

Bonds have experienced a sell-off this year, with 30-year yields climbing 64 basis points, or 0.64 percentage point, since June.

Some of Logan’s colleagues suggested this week that the central bank could afford to be patient with its next rate hike. Vice Chair Philip Jefferson and New York Fed President John Williams, who together with Chairman Jerome Powell are sometimes called the central bank’s leadership troika, advised waiting to assess incoming data before deciding on policy.

These comments reduced market expectations for a hike at the Fed’s October 27-28 meeting. Investors now assign just a 28% probability to an increase next month, based on federal funds futures contracts, down from 70% earlier in the 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.

“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.”