Dallas Federal Reserve President Lorie Logan on Saturday became the latest policymaker to try to temper the market’s dovish interpretation of the central bank’s current policy stance, saying that another interest rate hike can’t be ruled out.
Logan said she was concerned about the drop in long-term interest rates that began in November. Treasury yields moved lower after markets started to sense the Fed might not hike rates again.
Financial conditions eased further after the Fed’s December policy meeting, with markets now pricing in six rate cuts beginning in March. Market expectations were tempered Friday in the wake of the stronger than expected December jobs data and the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose to the highest level since December.
In her speech to the American Economics Association in San Antonio, Logan said easier financial conditions might strengthen the economy and refuel inflation, risking the progress the Fed has made on bringing the price rises down since the summer.
“In light of the easing in financial conditions in recent months, we shouldn’t take the possibility of another rate increase off the table just yet,” Logan said.
“We can’t count on sustaining price stability if we don’t maintain sufficiently restrictive financial conditions,” she added.
While inflation today is in a much better place than last January, the Fed’s challenge is to bring inflation back to the 2% target, she said.
In general, many Fed watchers think there is a high bar for another rate hike. They think it is more likely that the Fed would hold rates steady — a policy dubbed “higher for longer” — than to push up the policy rate again.
“No one thinks they will have to deliver another hike. The whole debate really is how long do we hold here,” said Ellen Zenter, chief U.S. economist at Morgan Stanley, in an interview with MarketWatch.
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