A prominent member of the US Federal Reserve's rate-setting committee expressed her endorsement of additional monetary tightening, as policymakers deliberate on measures to rein in persistent inflation in the world's largest economy.
Following ten consecutive increases in inflation-targeting interest rates, the Federal Open Market Committee (FOMC) decided last month to pause its aggressive campaign, allowing policymakers more time to evaluate the strength of the US economy.
Alongside the decision to pause rate hikes, the FOMC indicated that two additional quarter percentage-point increases to the benchmark lending rate would likely be necessary this year to bring inflation back down to its long-term target of two percent.
During a conference in New York, Dallas Fed President Lorie Logan emphasized the importance of following through on the signal sent by the FOMC in June. She stated that to have confidence in inflation returning to target within a suitable timeframe, more than just modest rebalancing would be required.
However, Logan noted that her support for the FOMC's prediction of two additional hikes was contingent on the absence of any significant unexpected events.
Minutes released by the Fed on Wednesday revealed that some FOMC members initially supported another interest rate hike last month to combat inflation before unanimously backing the pause.
On Thursday, Lorie Logan confirmed that she was among those initial supporters. In prepared remarks, she stated, "In my view, it would have been entirely appropriate to raise the federal funds target range at the FOMC's June meeting, consistent with the data we had seen in recent months and the Fed's dual-mandate goals." However, she also acknowledged the merits of skipping a meeting and adopting a more gradual approach in a challenging and uncertain environment.
Logan emphasized that the impact of financial conditions on the economy extends beyond the precise path of the policy rate, stating, "Financial conditions matter more for the economy than the precise path of the policy rate."
Futures traders are currently assigning a probability of over 90 percent for the implementation of the first of these hikes at the Fed's upcoming meeting later this month, according to data from CME Group.
Logan further explained that financial conditions depend not only on the speed of rate increases but also on the level they ultimately reach, the duration spent at that level, and crucially, the factors influencing further increases or decreases.
