Fed's Lorie Logan warns of possible rate hike to counter inflation risks

Federal Reserve Bank of Dallas President Lorie Logan cautioned on Saturday that the US central bank might need to resume raising its short-term policy rate to prevent a recent decline in long-term bond yields from reigniting inflation.

Logan, speaking at an American Economic Association conference in San Antonio, Texas, said that there is a risk of inflation resurging if sufficiently tight financial conditions are not maintained. She emphasised that, given the easing in financial conditions, the possibility of another rate increase should not be ruled out.

While the Fed aggressively raised its benchmark policy rate in 2022 and the first part of 2023 to counter 40-year-high inflation, it has maintained stability in the 5.25-5.5 per cent range since July of last year. Despite indications from policymakers last month that they were likely done with rate hikes and considering interest-rate cuts, Logan's perspective differs, pushing back against the prevalent expectations of steep rate reductions this year.

Logan highlighted that the effects of past rate hikes are mostly behind us, and the recent decline in the yield on the 10-year Treasury note could lead to increased demand, potentially undoing progress on inflation. Stressing the role of restrictive financial conditions in aligning demand with supply and anchoring inflation expectations, she expressed the importance of maintaining such conditions for sustaining price stability.

Notably, Logan was amongst the first Fed policymakers in October to suggest that rising long-term bond yields were assisting the Fed's objectives, allowing it to keep the policy rate unchanged. Additionally, she suggested considering slowing the process of shrinking the Fed's balance sheet, stating that it is appropriate to assess the parameters guiding a decision to decelerate the asset runoff as reverse repurchase agreement balances approach a low level.

(With Reuters Inputs)