Logan's call for at least 50 basis points more is among the most explicitly hawkish recent Fed views and cuts against the market's retreat from October hike pricing after softer PCE data. It could support the front end of the Treasury curve and the US dollar, particularly if Friday's payrolls come in strong. Her acknowledgement that higher term premiums may tighten conditions for the Fed offers a partial offset, suggesting long-end yields near 2002 highs could reduce the number of hikes needed. With oil back above $100 on the Iran war and diesel shortages, energy-driven inflation risk gives hawks like Logan further ammunition.
Logan thinks the Fed has barely started: one hike down, at least two to go, and last year's cuts still to be clawed back.
Summary:
Dallas Federal Reserve President Lorie Logan said on Thursday that the Fed will need to raise interest rates by at least another half a percentage point to make monetary policy modestly restrictive and put inflation back on course for the central bank's 2% target.
In remarks prepared for business and community leaders at the Dallas Fed, Logan described last month's quarter-point increase, which lifted the policy rate to a range of 3.75% to 4.00%, as an important first step in tightening. In her estimate, however, the target range needs to rise by 50 basis points or more to properly balance the risks to the Fed's employment and inflation goals, and she stressed the need to restore price stability.
Logan said current policy is not restrictive. She described the economy as strengthening and the labour market as well balanced, and said that while inflation is easing as temporary factors fade, it does not appear likely to fall much below 2.5% without further rate rises.
She also framed the additional tightening as a reversal of last year's easing. In her view, a few more increases would undo the risk management cuts the Federal Open Market Committee made late last year, when it lowered rates by a combined 75 basis points over its final three meetings.
Logan's comments came on a day when the 10-year Treasury yield touched its highest level in 24 years before falling back to around 5.24%. She said higher long-term yields show investors expect strong growth and a higher policy rate, but noted they may also reflect higher term premiums, which can slow the economy and reduce the need for the Fed to tighten.
The precise level of rates needed to achieve some restriction is uncertain and shifts with broader financial conditions, she said, adding that she will watch the labour market, prices, growth, consumption and financial conditions to judge whether policy is becoming restrictive.
Her remarks contrast with Goldman Sachs, which this week pushed its forecast for the next hike to December and said the Fed may conclude no further increases are needed. Friday's September jobs report is the next key input for that debate.
This article was written by Eamonn Sheridan at investinglive.com.
Source: Investing Live - Central Bank
