Antonistock
Financial conditions will have to remain tight for inflation to return to the Federal Reserve’s 2% target, Dallas Fed President Lori Logan said Monday morning in prepared speech text. But whether the central bank needs to raise interest rates again will depend on What factors are driving the rise in long-term interest rates.
“If long-term interest rates remain elevated due to higher term premiums, there may be less need to increase the federal funds rate,” he said. “However, to the extent that the strength of the economy is behind the rise in long-term interest rates, the FOMC may need to do more.”
Higher term premiums may be due to increases in debt supply relative to investor demand, changes in correlations between returns on different asset classes, and lower expectations regarding the Federal Reserve’s asset holdings. . “The expectation of lower Federal Reserve asset holdings over time implies that other investors will need to hold more long-duration securities, which appears to be one of many factors contributing to higher term premiums,” Logan said.
The inflation rate has slowed substantially, with the three-month core PCE inflation rate through August at 2.2% and the Dallas Fed cutting the average by 2.6%. But Logan isn’t ready to declare victory. “These developments are encouraging, but it is still too early to say with confidence that inflation is heading towards 2% in a sustainable and timely manner,” he said.
The labor market plays a key role in inflation. While the market is not as active as it was a year ago, job openings continue to outnumber available workers and wage growth continues to rise faster than “would be consistent with 2% inflation over the long term. given typical productivity trend estimates.” growth”, she saying.
Logan said she remains vigilant about the risks to both the Fed’s price stability and full employment mandates. At this point, high inflation is the most important risk. “We can’t let it take hold or rekindle,” Logan said.
