(Bloomberg) -- Federal Reserve Bank of Dallas President Lorie Logan said while more interest-rate cuts are likely needed, policymakers should move at a slow pace given uncertainties about how restrictive monetary policy currently is.
“I think it behooves us to proceed cautiously at this point,” Logan said Wednesday in prepared remarks to an energy conference co-hosted by the Kansas City and Dallas reserve banks.
Logan, who doesn’t vote on monetary policy this year but said she has supported interest-rate reductions so far, noted three risks that might yet derail the Fed even as it nears its dual goals of maximum employment and stable prices. Logan has previously said she thinks the Federal Open Market Committee should move at a slow pace.
“I anticipate the FOMC will most likely need more rate cuts to finish the journey,” Logan said. “But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.”
Fed officials lowered the federal funds rate for a second straight meeting earlier this month, cutting by a quarter percentage point to a range of 4.5% to 4.75%. After lowering rates by a half-point in September, officials signaled two additional quarter-point cuts this year — at the November and December meetings.
In data released earlier Wednesday, the core consumer price index, which excludes volatile food and energy prices, increased 0.3% for a third month and 3.3% from a year ago. The overall measure rose 2.6% from a year before, marking the first acceleration on an annual basis since March.
Logan said progress on cooling inflation has been broad-based, but price pressures haven’t yet returned to the Fed’s 2% target. A pickup in demand or supply shocks could keep inflation elevated, she said.
At the same time, a run-up in Treasury yields — those on 10-year Treasuries have risen by more than three quarters of a percentage point in recent months — suggests a rise in term premiums, Logan said. Term premiums reflect the extra compensation investors demand for buying long-dated bonds.
That development, she added, could weigh on the economy and ultimately require the Fed to cut rates more. So far, though, the bond rout has been mitigated by a rise in other asset prices, including stocks.
Where’s Neutral?
Logan repeated that the neutral level of interest rates — where monetary policy neither weighs on nor stimulates the economy — may be higher now than previously thought. By some measures, the current fed funds rate is close to it now, she said, though it’s difficult to quantify precisely.
She said the labor market seems to be close to balanced or cooling gradually, though some indicators show signs of underlying weakness.
Hiring remains robust, though it slowed in October in large part due to hurricanes and a labor strike. A broad measure of unemployment that includes those working part-time for economic reasons and those who are marginally attached to the labor force is a percentage point higher than earlier last year.
Investors have also pared back bets for future rate cuts from the Fed following the re-election of Donald Trump, who has promised policies that economists say could reignite inflation.
Logan, whose speech was sprinkled with ship metaphors, said the economy and consumption remain robust and that contacts in the Dallas Fed region tell her downside risks are fading.
“After a voyage through rough waters, we’re in sight of the shore: the FOMC’s Congressionally-mandated goals of maximum employment and stable prices,” Logan said. “But we haven’t tied up yet, and risks remain that could push us back out to sea or slam the economy into the dock too hard.”
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