Logan: Fed needs at least half-point more in rate hikes

Logan's demand for at least another half-percentage point ranks as one of the most overtly hawkish Fed views lately, going against the market's retreat from October hike pricing after softer PCE data. That stance could bolster the short end of the Treasury curve and the dollar, especially if Friday's jobs data prove robust. Her recognition that elevated term premiums might tighten financial conditions provides some mitigation, implying that long-maturity yields close to multi-decade peaks could lessen the required number of rate increases. With crude oil trading above $100 because of the Iran war and diesel shortages, energy-induced inflation pressures offer additional justification for hawkish policymakers such as Logan.

Logan believes the Fed's tightening campaign is just beginning: one rate increase completed, at least two more pending, and the reductions from last year yet to be reversed.

• Dallas Fed President Lorie Logan believes the policy rate must increase by 50 basis points or more to turn modestly restrictive.
• She described the quarter-point rise last month, taking the rate to 3.75% to 4.00%, as a crucial initial move.
• Logan expects inflation will not drop substantially below 2.5% absent additional rate increases.
• She characterized growth as accelerating and the labor market as evenly matched.
• In her assessment, a handful of additional increases would reverse the 75 basis points of risk-management reductions implemented late last year.
• She noted that elevated long-term yields might partially stem from term premiums, which could diminish the requirement for policy tightening.

On Thursday, Dallas Fed President Lorie Logan stated that the Federal Reserve must increase interest rates by at least another half percentage point to achieve a modestly restrictive policy stance and steer inflation toward the 2% goal.

Speaking to business and community leaders at the Dallas Fed, Logan characterized the quarter-point hike last month — which brought the policy rate to 3.75% to 4.00% — as a key initial step in tightening. She estimated, however, that the target range must climb by 50 basis points or more to adequately balance the risks to the Fed's dual mandate, and she emphasized the necessity of restoring price stability.

Logan stated that current policy is not restrictive. She portrayed the economy as gaining strength and the job market as evenly balanced, adding that although inflation is abating as transitory pressures dissipate, it is unlikely to drop much beneath 2.5% without additional rate increases.

She also portrayed further tightening as undoing last year's easing. She believes that several more rate rises would reverse the risk-management reductions that the Federal Open Market Committee enacted late last year, when it cut rates by a total of 75 basis points over its last three gatherings.

Logan spoke on a day when the 10-year Treasury yield reached its highest in 24 years before easing to roughly 5.24%. She remarked that elevated long-term yields indicate investors anticipate robust growth and a higher policy rate, but she noted they could also stem from higher term premiums, which could slow economic activity and lessen the Fed's need for tightening.

The exact level of rates required to achieve some constraint is uncertain and changes with overall financial conditions, she said, adding that she will monitor the labor market, prices, growth, consumption, and financial conditions to assess whether policy is turning restrictive.

Her comments diverge from Goldman Sachs, which this week moved its prediction for the next rate increase to December and suggested the Fed might decide that no more increases are necessary. The September employment report due Friday is the next significant factor in that discussion.