Dallas Fed President Logan calls for ‘modestly’ higher interest rates

Arguing that this week’s good inflation news isn’t good enough, Dallas Federal Reserve President Lorie Logan on Thursday called for “modest” interest rate hikes to win the battle the central bank has lost for the past five years.

Logan, a voting member of the rate-setting Federal Open Market Committee this year, insisted inflation was still a big problem for U.S. households, demanding action from policymakers. While other Fed officials have expressed a preference for higher rates if inflation indicators do not improve, Logan’s was the most prominent call for an increase.

“I believe slightly higher interest rates at this time would better balance the outlook and risks to the FOMC’s dual mandate objectives,” Logan said in remarks prepared for a speech in Houston. he said. “Inflation above target month after month has increased the pressure on Americans’ budgets.”

Earlier in the week, the Bureau of Labor Statistics reported some progress on this front: Consumer prices fell 0.4% in June, the largest monthly decline since April 2020; wholesale prices fell 0.3%. Both indicators benefited from the decline in oil prices, but costs in some other key categories, especially housing, also softened.

Still, Logan said there’s still work to be done to reach the Fed’s 2% inflation target. Despite the monthly decrease, consumer prices increased by 3.5% compared to the previous year, while wholesale costs increased by 5.5%. Inflation has been above the central bank target since the beginning of 2021.

“One month of relief is not enough. It is time to finish the job of restoring price stability,” he said. “In monetary policy, as in hockey, you have to go where the puck goes. Unfortunately, inflation is unlikely to return to 2 percent in a sustainable way.”

Markets currently expect the FOMC to raise its key overnight borrowing rate by a quarter point later this year, according to CME Group’s report; possibly in September, but most likely in October. FedWatch Fed funds track futures pricing.

While the committee’s next meeting will take place on July 28-29, traders priced the increase probability at only 12.3%.

Logan pointed to a number of widely cited indicators, as well as alternative measures such as subtracting home prices from core prices, to show that inflation remains well ahead of the Fed’s target despite the recent decline in energy prices and fading tariff effects.

“If inflation doesn’t reach 2 percent on its own, at least some policy constraints are needed to help get there,” he said. “If high inflation becomes permanent, we will need sharper rate increases to get it back on target, at a greater cost to the labor market. Moderate restraint now is better than severe restraint later.”

Logan did not indicate whether he would push for a rate hike at this month’s meeting or how much he thinks rates should rise.