Fed's Logan says her base case calls for holding rates steady a while longer
Dallas Federal Reserve Bank President Lorie Logan spoke at a World Affairs Council event in San Antonio on Tuesday. Logan said that the Fed will probably need to leave interest rates where they are for a while longer to ensure inflation stays low in the face of upward pressure from the US President Donald Trump administration's tariffs.
Key quotes
Base case is that monetary policy needs to hold tight for a while longer to bring inflation down.
Want to see low inflation continue longer to be convinced.
June CPI data suggests PCE inflation, which the Fed targets at 2%, will rise.
Also possible that softer inflation, weakening labor market will call for lower rates 'fairly soon.’
Labor market remains solid, fiscal policy set to be a tailwind for growth.
Under base case can sustain maximum employment even with modestly restrictive policy.
If Fed misjudges and doesn't cut soon enough, it could cut rates further to get employment back on track.
Tariff increases appear likely to create additional inflationary pressure for some time.
If Fed cuts rates too soon, risks deeper economic scars on longer road to price stability.
Market reaction
At the time of writing, the US Dollar Index (DXY) is trading 0.03% lower on the day to trade at 98.60.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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