The president of the Federal Reserve Bank of Dallas, Lorie Logan, recently discussed the possibility of further interest-rate hikes if inflation begins to rise again. While many investors anticipate interest rate cuts in 2024, Logan cautions against assuming that this is a given.
Logan’s remarks were made during a panel discussion at the annual meetings of the American Economic Association and the International Banking, Economics, and Finance Association. She emphasized the importance of maintaining tight financial conditions to prevent a resurgence of inflation.
“In light of recent easing in financial conditions, we should not dismiss the possibility of another rate increase just yet,” Logan stated. Her concern is that without sufficient restrictions in financial conditions, there is a risk that inflation may pick up and undermine the progress that has been made.
The current federal-funds rate, which was set by the Federal Open Market Committee in July, stands between 5.25% and 5.5%. While the committee maintained this rate at its mid-December meeting, it is widely anticipated that rates will gradually decrease throughout 2024. However, Logan disputes the assumption that rate cuts are guaranteed.
Although inflation has improved since last January, Logan believes the task of restoring price stability is not yet complete. The challenge now is to bring inflation sustainably back to the 2% target. According to the U.S. Bureau of Labor Statistics, the consumer price index in November rose by 3.1% over the past year. Updated data is expected on January 11.
Logan mentioned that economic growth appears to be stabilizing and that the labor market continues to rebalance. However, she highlighted certain risks that could hinder a return to 2% inflation. Geopolitical threats to supply chains and “financial fragilities” in commercial real estate and other sectors are identified as potential obstacles.
The role of restrictive financial conditions in aligning demand with supply and anchoring inflation expectations cannot be understated, according to Logan. Maintaining sufficiently restrictive financial conditions is crucial for sustaining price stability.
As the topic of interest rates and inflation evolves, it remains essential to closely monitor developments in the financial landscape. Continued attention to the delicate balance between inflation and financial conditions is vital for economic stability.
The federal-funds rate, currently set at 5.25% to 5.5% by the Federal Open Market Committee in July, is expected to gradually decrease throughout 2024.
Logan warns that assumptions of rate cuts are premature; instead, maintaining tight financial conditions is necessary to prevent a potential resurgence of inflation.
While inflation has improved since last January, the task of restoring price stability remains incomplete. The challenge at hand is to achieve sustainable inflation at the 2% target.
According to the U.S. Bureau of Labor Statistics, the consumer price index in November increased by 3.1% over the past year. Updated data is anticipated on January 11.
Geopolitical threats to supply chains and “financial fragilities” in areas such as commercial real estate pose risks to returning to 2% inflation.
Logan emphasizes the importance of restrictive financial conditions in aligning demand with supply and maintaining price stability.