WASHINGTON: Federal Reserve Bank of Dallas President Lorie Logan on Saturday warned that the US central bank may need to resume raising its short-term policy rate to keep a recent decline in long-term bond yields from rekindling inflation.
“If we don’t maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up and reverse the progress we’ve made,” Logan said in remarks prepared for delivery at an American Economic Association conference in San Antonio, Texas. “In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet.”
The Fed raised its benchmark policy rate agressively in 2022 and the first part of 2023 to bring down what had been 40-year-high inflation, but since last July has kept it steady in the 5.25%-5.5% range.
Policymakers last month signaled they had seen enough progress on inflation to likely be done with rate hikes and to turn to interest-rate cuts this year. Financial markets responded by betting big on steep rate reductions this year.
Logan’s view marks a pushback on those bets.
With the effects of the Fed’s past rate hikes mostly behind us, Logan said, the decline in the yield on the benchmark 10-year Treasury note — from around 5% in mid-October to around 4% now — could set the stage for a pickup in demand that could undo progress on inflation.
“Restrictive financial conditions have played an important role in bringing demand into line with supply and keeping inflation expectations well-anchored,” she said, noting that inflation has come down closer to the Fed’s 2% target and the labor market, while still tight, is rebalancing. “We can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions.”
Her remarks are notable particularly because she was among the first of Fed policymakers, last October, to suggest that the rise in long-term bond yields was doing some of the Fed’s work for it, and meant the Fed could leave the policy rate where it was.
Logan also signaled she feels it is time to start thinking about slowing the process of shrinking the Fed’s balance sheet.
“I think it’s appropriate to consider the parameters that will guide a decision to slow the runoff of our assets,” she said. “In my view, we should slow the pace of runoff” as overnight reverse repurchase agreement balances approach a low level.
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