Economic data indicate the need for higher rates to avoid entrenched inflation, the Dallas Fed president said.
Dallas Federal Reserve President Lorie Logan recently pointed to labor market conditions and inflation data as the explanation for a potential eleventh rate hike at the next Federal Open Market Committee (FOMC) meeting in June.
“After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress,” Logan said in prepared remarks to the Texas Bankers Association in San Antonio. “The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”
The next Consumer Price Index data set is scheduled to be released on June 13, coinciding with the upcoming two-day policy meeting, in which voting Fed members will decide whether to raise, pause, or cut rates.
As a voting member, Logan claimed the Fed had made progress in restoring price stability over the last 14 months but questioned whether inflation is truly on track to return to the Fed’s 2% target.
“Inflation remains much too high,” Logan said during her speech, adding that it “challenges families and businesses in the short run, and weakens our economy in the long run. So, restoring price stability remains a critical priority.”
Still, some progress has been made, Logan suggested.
“Inflation in recent months has been lower than the worst peaks last year, the labor market has cooled somewhat, and activity in some sectors, such as housing, has slowed dramatically,” she said.
While Logan doesn’t see substantial evidence to support a rate pause in June, CME Groups’ FedWatch Tool, which tracks the 30-Day Fed Funds futures, forecasts an 81.4% chance of a rate pause and only an 18.6% chance of a 0.25% increase. The Dallas Express pulled data for the Fed Funds futures on May 19 at 5 p.m.
If the FOMC goes with another 25 basis point increase in June, it would raise the Fed’s target rate to 5.25%-5.50%, higher than the forecasted range in December’s Summary of Economic Projections.
Because of the potential costs of unanchored expectations, Logan believes the path toward price stability can only be achieved by getting inflation back to 2% in a sustainable and timely way. However, she says that the U.S. Central Bank hasn’t made enough progress yet and that getting inflation down from 5% to 2% could be a lengthy endeavor.
“If the FOMC doesn’t stay committed to restoring price stability, the public could come to expect persistently high inflation. A self-fulfilling spiral of unanchored inflation expectations would require much larger rate increases to stop,” Logan said. “Ultimately, that scenario would be worse for workers, households, businesses, and banks than the costs of tighter monetary policy today.”