Dallas Federal Reserve Bank President, Lorie Logan, addressed the National Association for Business Economics meeting on Monday, discussing the potential implications of the rise in long-term Treasury yields. Logan suggested that if the increase in these yields is driven by higher term premiums, it could result in elevated interest rates at a consistent federal funds rate. This would aid in cooling down the economy and reduce the need for further monetary policy tightening.
However, she also noted that if the surge in long-term interest rates is due to economic strength, additional tightening might be necessary. The Federal Reserve has already increased their benchmark rate by more than five percentage points over 19 months, with officials considering another hike this year. Since their September meeting, the yield on 30-year Treasury securities has surpassed 5%, a level not seen since 2007.
Logan emphasized the importance of restrictive financial conditions to achieve the Federal Reserve’s 2% inflation target. She cautioned against prematurely predicting a sustainable path towards this target, despite recent declines in inflation rates. The three-month core PCE rate currently stands at 2.2%, and the Dallas Fed trimmed mean is at 2.6%.
The Dallas Fed President also expressed concerns over high inflation risk. She pointed out factors such as an increase in debt supply, changes in asset return correlations, and expectations of reduced Fed asset holdings leading investors to hold more long-duration securities as contributors to higher term premiums.
Logan also highlighted the robustness of the labor market, with job openings exceeding available workers and wage growth outpacing levels suitable for 2% inflation given trend productivity growth. She remains vigilant about threats to the Fed’s dual mandate of price stability and full employment, particularly emphasizing high inflation as a primary risk.
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