(Reuters) – Dallas Federal Reserve Bank President Lorie Logan on Wednesday laid out a case for slowing the pace of the U.S. central bank’s interest-rate hikes in order to higher calibrate monetary policy to an uncertain economic outlook, but signaled rates could ultimately rise further than many now expect.
“In the event you’re on a road trip and also you encounter foggy weather or a dangerous highway, it’s an excellent idea to decelerate. Likewise should you’re a policymaker in today’s complex economic and financial environment,” Logan said in her first major policy speech since taking the highest job on the Dallas Fed last yr. “That’s why I supported the (Fed’s) decision last month to scale back the pace of rate increases. And the identical considerations suggest slowing the pace further on the upcoming meeting.”
A slower pace doesn’t mean any less commitment to bringing inflation all the way down to 2%, she said, and if slowing rate hikes eases financial conditions by reducing uncertainty, she said, “we will offset the effect by regularly raising rates to the next level than previously expected.”
With a lot unknown about 2023, she said, the Fed shouldn’t “lock in” on a peak policy rate but as a substitute stay flexible by increasing rates in smaller increments.
“My very own view is that we are going to likely have to proceed regularly raising the fed funds rate until we see convincing evidence that inflation is on the right track to return to our 2 percent goal in a sustainable and timely way,” she said.
Inflation by the Fed’s preferred gauge, the private consumption expenditures price index, has averaged 5.8% at an annual rate for the past two years.
Fed policymakers make their next rate-setting decision once they meet in Washington Jan. 31-Feb. 1, and are widely expected to deliver a quarter-point rate of interest hike following December’s half-point increase and 4 straight 75-basis-point rate hikes before that
Recent data suggests those rate hikes, together with healing supply chains, are starting to slow inflation for goods, and can soon slow inflation in the associated fee of rents and housing, but services inflation driven by an “overheated” labor market stays an issue, Logan said.
“An important risk I see is that if we tighten too little, the economy will remain overheated, and we are going to fail to maintain inflation in check,” Logan said, while also noting the alternative risk of doing an excessive amount of and weakening the labor market greater than obligatory.
(Reporting by Ann Saphir in Berkeley, Calif.; Editing by Matthew Lewis)
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