US monetary policy may not be tight enough, Fed’s Logan says

11:35 am Friday, May 10th, 2024

By Ann Saphir

NEW ORLEANS, Louisiana (Reuters) -Dallas Federal Reserve President Lorie Logan on Friday said it’s not clear if monetary policy is tight enough to bring inflation down to the U.S. central bank’s 2% goal, and with price pressures still too strong, it is too soon to be cutting interest rates.

There are still good reasons to think that inflation will return to 2% in the coming years, Logan told the Louisiana Bankers Association’s annual conference. “There are also important upside risks to inflation that are on my mind, and I think there’s also uncertainties about how restrictive policy is and whether it’s sufficiently restrictive to keep us on this path.”

The U.S. central bank last week kept its policy rate in the 5.25%-5.50% range, with Fed Chair Jerome Powell noting a lack of progress on inflation so far this year means rates will likely need to stay where they are for longer than previously thought. 

“As I think about appropriate policy, I think it’s just too early to think about cutting rates,” Logan said on Friday.

The labor market and the broader economy remain strong, she said, an unusual combination in light of the rapid decline in inflation last year.

“But it’s not a ‘soft landing’ until we’ve landed, and we haven’t yet landed,” Logan said, referring to a scenario in which inflation falls without triggering a painful recession or major job losses. She added that inflation data, particularly in the first quarter, “was a bit disappointing to us, and it’s a good reminder of the work that we still have to do.”

The Fed’s gauge for its 2% inflation target – the year-over-year change in the personal consumption expenditures price index – dropped from a high of 7.1% in mid-2022 to 2.5% in January 2024, and most recently in March ticked up to 2.7%.

Meanwhile, the U.S. unemployment has remained low by historical standards, and at 3.9% in April is only a few tenths of a percentage point higher than where it was when the Fed began its rate-hike campaign in March 2022.

As of March, most Fed policymakers still thought the central bank would likely cut rates two or three times this year to avoid letting policy get overly tight and unduly harming the labor market. Logan on Friday did not articulate a view on the potential timing for rate cuts.

“I think I need to see some of these uncertainties resolved about the path that we’re on, and we need to remain very flexible to policy, and continue to look at the data that’s coming in and to watch how financial conditions are evolving and make sure the judgments that we’re making are appropriate.”

(Reporting by Ann Saphir; Editing by Paul Simao)