Fed may need another 50 bps or more in rate hikes to tame inflation, says Dallas Fed chief

The US Federal Reserve may need to raise interest rates by another 50 basis points or more to bring inflation back towards its 2 per cent target, Dallas Fed President Lorie Logan said.

The Fed’s quarter-point rate increase last month, which took its policy rate to 3.75-4 per cent, was an “important first step” in tightening monetary policy, Logan said in prepared remarks to Texas business executives and community leaders.

“Still, I currently estimate the target range needs to rise an additional 50 basis points or more to appropriately balance the outlook and risks for our dual mandate goals,” Logan said. “We must restore price stability.”

Inflation remains above target

Logan said the US economy was strengthening and the labour market remained well balanced. While inflation has been easing as temporary factors fade, she said it was unlikely to fall much below 2.5 per cent without further rate increases.

“A few additional increases in the target range would undo the FOMC’s risk management cuts from last fall,” Logan said, referring to the Federal Open Market Committee’s 75 basis points of rate cuts over its final three meetings of last year.

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Her comments come as other Fed officials have called for patience before the next rate move. New York Fed President John Williams said the central bank had time to assess incoming data before deciding when to raise rates again.

Markets have also scaled back expectations of an October hike following softer-than-expected inflation data. Goldman Sachs has pushed its forecast for the next rate increase to December and said the Fed could ultimately decide that further hikes are unnecessary.

Bond yields climb

Logan’s remarks came as the benchmark 10-year US Treasury yield touched a 24-year high before falling back to around 5.24 per cent.

She said higher long-term bond yields suggest investors expect stronger economic growth and a higher Fed policy rate. But she also noted that higher term premiums could be driving yields higher.

Higher term premiums can tighten financial conditions and slow economic activity, potentially reducing the need for further policy tightening, Logan said.

She added that the level at which monetary policy becomes restrictive is uncertain and depends on the broader financial environment.

“I will continue to watch labor markets, prices, growth, consumption and financial conditions to evaluate whether policy is becoming restrictive,” Logan said.