Cautious Approach to Interest Rate Cuts

(Reuters) – The U.S. central bank should proceed cautiously on further interest rate cuts to avoid inadvertently reigniting inflation, stated Dallas Federal Reserve President Lorie Logan on Wednesday.

Logan, speaking at an energy conference at the Dallas Fed, noted that significant progress has been made in reducing inflation from 40-year highs. "I anticipate the FOMC will most likely need more rate cuts to finish the journey," she expressed. However, she cautioned that "it's difficult to be sure how many cuts may be needed and how soon they may need to happen."

Following 75 basis points of rate cuts by the Federal Open Market Committee in recent months, the Fed policy rate now stands in the 4.50%-4.75% range, which she described as "right at the top" of the estimated neutral rate range. At this neutral rate, the cost of money neither supports nor hampers economic growth.

Logan warned, "If we cut too far, past neutral, inflation could reaccelerate and the FOMC could need to reverse direction." She emphasized the importance of caution in these uncertain but potentially shallow economic waters.

Her remarks came before the release of data showing consumer prices rose 2.6% over the 12 months through October, aligning with economists' predictions.

Financial markets reacted by increasing expectations for a quarter-percentage-point rate cut in December and anticipated continued cuts, albeit at a slower pace, through mid-2025.

While Logan did not explicitly state her view on the appropriateness of a rate cut at the Fed's upcoming December 17-18 meeting, her comments imply that she favors a gradual approach to further cuts.

She also noted risks to inflation, particularly from a potential post-election surge in business investment and consumer spending. Although she recognized a cooling labor market, with an unemployment rate at 4.1%, she did not see substantial deterioration.

Logan acknowledged that a recent increase in Treasury yields might slow the economy more than intended, posing risks to employment, but argued that the neutral rate's rise in recent years could mean that Fed policy isn’t constraining the economy as much as it seems.

"I am keeping an open mind, scrutinizing economic data and financial conditions, and listening carefully to business and community contacts as I assess what next steps may be appropriate for monetary policy," she concluded.