By Ann Saphir
(Reuters) – Federal Reserve Financial institution of Dallas President Lorie Logan on Saturday warned that the U.S. central financial institution could must resume elevating its short-term coverage fee to maintain a current decline in long-term bond yields from rekindling inflation.
“If we don’t keep sufficiently tight monetary situations, there’s a threat that inflation will decide again up and reverse the progress we’ve made,” Logan mentioned in remarks ready for supply at an American Financial Affiliation convention in San Antonio, Texas. “In mild of the easing in monetary situations in current months, we shouldn’t take the opportunity of one other fee enhance off the desk simply but.”
The Fed raised its benchmark coverage fee agressively in 2022 and the primary a part of 2023 to deliver down what had been 40-year-high inflation, however since final July has stored it regular within the 5.25%-5.5% vary.
Policymakers final month signaled they’d seen sufficient progress on inflation to probably be accomplished with fee hikes and to show to interest-rate cuts this 12 months. Monetary markets responded by betting huge on steep fee reductions this 12 months.
Logan’s view marks a pushback on these bets.
With the consequences of the Fed’s previous fee hikes largely behind us, Logan mentioned, the decline within the yield on the benchmark 10-year Treasury observe — from round 5% in mid-October to round 4% now — might set the stage for a pickup in demand that would undo progress on inflation.
“Restrictive monetary situations have performed an essential function in bringing demand into line with provide and maintaining inflation expectations well-anchored,” she mentioned, noting that inflation has come down nearer to the Fed’s 2% goal and the labor market, whereas nonetheless tight, is rebalancing. “We will’t depend on sustaining value stability if we don’t keep sufficiently restrictive monetary situations.”
Her remarks are notable notably as a result of she was among the many first of Fed policymakers, final October, to recommend that the rise in long-term bond yields was doing among the Fed’s work for it, and meant the Fed might go away the coverage fee the place it was.
Logan additionally signaled she feels it’s time to begin excited about slowing the method of shrinking the Fed’s steadiness sheet.
“I feel it’s acceptable to contemplate the parameters that can information a choice to sluggish the runoff of our property,” she mentioned. “In my opinion, we should always sluggish the tempo of runoff” as in a single day reverse repurchase settlement balances method a low stage.
(Reporting by Ann Saphir; modifying by Diane Craft)