The Federal Reserve should gradually reduce its benchmark lending rate to help manage risks to inflation and the labor market if the economy evolves as projected, according to Dallas Fed President Lorie Logan in a speech delivered on Monday. Recently, the central bank's Federal Open Market Committee (FOMC) lowered interest rates by 50 basis points, bringing the range to 4.75% to 5%.
Bloomberg's compiled consensus had anticipated a more modest quarter-percentage-point cut. The FOMC undertook a period of tightening monetary policy from March 2022 through July 2023 to contain rising inflation rates. In her prepared remarks at the Securities Industry and Financial Markets Association's annual meeting, Logan suggested that the decision to cut rates in September was influenced by the fact that inflation and employment were approaching the FOMC's goals without being excessively stimulated.
She emphasized that a less restrictive policy could prevent unnecessary cooling in the labor market while striving to bring inflation back to target in a sustainable and timely manner. The FOMC's summary of economic projections from September indicated a reduction in the median federal funds rate outlooks from 2024 through 2026, along with a rise in expectations for unemployment rates.
Logan acknowledged that even though the economy remains strong and stable, the macroeconomic outlook is still fraught with significant uncertainties. She highlighted that the potential risks to the labor market have grown while inflation continues to pose diminished yet real upside risks. Logan noted, 'If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals.' She pointed out that she will not have voting rights on monetary policy decisions until 2026, which means her observations could influence future decisions indirectly.
Logan asserted that various shocks could impact the trajectory toward normalization, how swiftly policy adjustments should occur, and the ultimate levels that interest rates should settle at. Recent official data demonstrated that U.S. consumer inflation rose at a pace exceeding expectations in September, accompanied by job additions surpassing projections and a decline in the unemployment rate.
Presently, markets are estimating an approximately 85% probability that the FOMC will implement a rate cut of 25 basis points in the upcoming month, with the remaining likelihood favoring a maintenance of current monetary policy. 'I've been closely monitoring financial conditions, informed by insights from the Dallas Fed's surveys, as well as feedback from business and community contacts,' remarked Logan on Monday.
She stressed the importance for policymakers to remain agile and prepared to adjust rates where deemed necessary..