Dallas Fed President Lorie Logan remarks at a World Affairs Council event in San Antonio.
-
Base case is that monetary policy needs to hold tight for a while longer to bring inflation down
-
Want to see low inflation continue longer to be convinced
-
June CPI data suggests PCE inflation, which the Fed targets at 2%, will rise
-
Also possible that softer inflation, weakening labor market will call for lower rates ‘fairly soon’
-
Labor market remains solid, fiscal policy set to be a tailwind for growth
-
Under base case can sustain maximum employment even with modestly restrictive policy
-
If Fed misjudges and doesn’t cut soon enough, it could cut rates further to get employment back on track
-
Tariff increases appear likely to create additional inflationary pressure for some time
-
If Fed cuts rates too soon, risks deeper economic scars on longer road to price stability
Logan painted a cautious tone that resonates with both bond and equity markets: the base case calls for holding interest rates modestly restrictive for longer, as inflation still hasn’t convincingly fallen to the Fed’s 2% PCE target. June CPI data reinforces her caution—suggesting inflation pressures may persist.
Yet, this is not a one-way street. Logan acknowledges that slowing inflation and a softening labor market could open the door to rate cuts “fairly soon.” Market participants will tune in closely: this signals potential for a pivot if upcoming data shows sustained weakness—setting equities up for upside, while bond yields may moderate on changing expectations.
On the flip side, tariff increases remain a wildcard, posing upside risk to inflation forecasts and keeping markets wary of further Fed tightening. But the current economic backdrop—strong labor market and fiscal tailwinds—supports continued growth, giving the Fed room to maintain a restrictive stance without derailing job gains.
Key takeaway for markets:
-
Rates likely to stay put: No surprise hikes, and the Fed is in wait‑and‑see mode.
-
Cuts not off the table: Should inflation roll over and jobs soften, markets may price in a rate cut sooner than later.
-
Watch inflation vs. labor data: Upcoming CPI/PCE prints and payrolls will be crucial.
-
Tariff dynamics: Any new rounds could shift inflation expectations and tilt policy debates again.
In summary, Logan’s remarks reinforce the Fed’s “data-dependence.” That means markets now hinge on whether inflation fades or persists—and if labor market resilience continues. Investors should brace for policy patience, but also prepare for volatility if inflation surprises or labor cracks.
This article was written by Eamonn Sheridan at www.forexlive.com.