Federal Reserve Bank of Dallas President Lorie Logan has cautioned regarding the recent decline in long-term bond yields. She highlighted concerns that this trend might rekindle inflationary pressures, warning that the central bank might need to resume raising its short-term policy rate to counteract potential inflation risks.
Logan emphasized the importance of maintaining sufficiently tight financial conditions to prevent a potential resurgence of inflation. The recent ease in financial conditions raises the risk of inflation recovering, reversing the progress in curbing inflationary pressures.
Fed’s Rate Hike and Current Policy Stance:
The Federal Reserve aggressively raised its benchmark policy rate in 2022 and the early part of 2023 but has since maintained it within the 5.25%-5.5% range. However, recent declines in long-term bond yields have prompted discussions about the possibility of further rate increases.
Logan’s remarks challenge market expectations that the Fed may proceed with interest rate cuts this year. She suggests that maintaining restrictive financial conditions is crucial to sustaining price stability and preventing inflation from exceeding the Fed’s 2% target.
Revisiting Balance Sheet Shrinking:
Logan also signaled the need to consider slowing down the process of reducing the Fed’s balance sheet. She believes that as overnight reverse repurchase agreement balances approach lower levels, adjusting the pace of asset runoff might be appropriate.
Logan’s recent statements are significant considering her earlier stance last October, where she suggested that rising long-term bond yields supported the Fed’s policies, indicating a stance of maintaining the policy rate.
The Call for Financial Restraint:
She emphasized that maintaining restrictive financial conditions has played a vital role in aligning demand with supply and stabilizing inflation expectations, underscoring the importance of continuing these conditions for sustained price stability.