Lori Logan, the President of the Federal Reserve Bank of Dallas, cautioned that the US central bank might need to resume raising short-term interest rates in order to control the rise in long-term bond yields, which would help curb the growing inflation.
In statements made at a conference of the American Economic Association in San Antonio, Texas, Logan stated, “If we do not maintain sufficiently strict financial conditions, there is a risk that inflation will rise again and reverse the progress we have made. In light of the loosening of financial conditions in recent months, we should not overlook the possibility of raising interest rates again,” according to Reuters.
Logan’s perspective reflects a backtracking of the prevailing expectations that the “Federal Reserve” will lower interest rates in 2023.
Logan pointed out that the decrease in yields on 10-year Treasury bonds, which dropped from around 5% in mid-October to around 4% now, could indicate that central banks have raised interest rates enough to start curbing inflation. However, he cautioned that this decrease in bond yields could also lead to an increase in demand, which could trigger a further increase in inflation.
The person stated that restrictive financial conditions played a significant role in decreasing inflation and maintaining stable inflation expectations, pointing out that inflation has already decreased close to the “Federal Reserve” target of 2 percent.
He went on to say, “We cannot rely on maintaining price stability unless we maintain sufficiently strict financial conditions to continue controlling demand.”
Lori Logan, the President of the Federal Reserve Bank of Dallas, has made noteworthy statements because she was one of the first policymakers at the central bank to point out that the rise in long-term bond yields could work in their favor, potentially enabling them to keep interest rates unchanged.
Logan also believes it might be suitable to contemplate delaying the process of reducing the public budget of the “Federal Reserve.”
He said, “I believe it is appropriate to consider the criteria that will guide the decision to slow down the flow of our assets. From my point of view, we should decrease the pace of the repurchase agreement tour as the balances approach a low level overnight.”
During the years 2022 and 2023, the Federal Reserve significantly increased the benchmark interest rate in an attempt to reduce inflation, which reached its highest level in 40 years. However, since last July, the Fed has maintained the interest rate steady at 5.25-5.5 percent.
In June, federal policy makers stated that they observed enough progress in reducing inflation, which implies that the bank might choose to lower interest rates this year. The financial markets reacted to these expectations by betting on significant interest rate reductions in the coming months.
