By Ann Saphir
(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 so as to better calibrate monetary policy to an uncertain economic outlook, but signaled rates could ultimately rise further than many now expect.
“If you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down. Likewise if you’re a policymaker in today’s complex economic and financial environment,” Logan said in her first major policy speech since taking the top job at the Dallas Fed last year. “That’s why I supported the (Fed’s) decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting.”
A slower pace does not mean any less commitment to bringing inflation down to 2%, she said, and if slowing rate hikes eases financial conditions by reducing uncertainty, she said, “we can offset the effect by gradually raising rates to a higher level than previously expected.”
With so much unknown about 2023, she said, the Fed should not “lock in” on a peak policy rate but instead stay flexible by increasing rates in smaller increments.
“My own view is that we will likely need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2 percent target in a sustainable and timely way,” she said.
Inflation by the Fed’s preferred gauge, the personal 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 when they meet in Washington Jan. 31-Feb. 1, and are widely expected to deliver a quarter-point interest rate hike following December’s half-point increase and four straight 75-basis-point rate hikes before that
Recent data suggests those rate hikes, along with healing supply chains, are beginning to slow inflation for goods, and will soon slow inflation in the cost of rents and housing, but services inflation driven by an “overheated” labor market remains a problem, Logan said.
“The most important risk I see is that if we tighten too little, the economy will remain overheated, and we will fail to keep inflation in check,” Logan said, while also noting the opposite risk of doing too much and weakening the labor market more than necessary.
(Reporting by Ann Saphir in Berkeley, Calif.; Editing by Matthew Lewis)