Dallas Fed’s Logan says rates should rise modestly to curb inflation

Dallas Federal Reserve President Lorie Logan said Thursday that U.S. interest rates should move “modestly” higher, arguing that inflation remains too far above the central bank’s 2% objective despite softer price data for June. The remarks from Logan, a voting member of the Federal Open Market Committee this year, add a specific call for tighter policy as traders price only limited odds of action at the Fed’s July meeting.

In prepared remarks for a speech in Houston, Logan said the recent improvement in inflation readings was insufficient to ease pressure on households or assure policymakers that price growth is moving back to target.

“I currently believe modestly higher interest rates would better balance the outlook and risks for the FOMC’s dual mandate goals,” Logan said. “Every month of above-target inflation has compounded the strain on Americans’ budgets.”

The Fed’s dual mandate requires it to pursue maximum employment and stable prices. Higher interest rates are intended to reduce demand by making borrowing more expensive for households and companies, a channel that can slow spending and investment and, over time, restrain inflation. The trade-off for policymakers is that tighter financial conditions can also weigh on hiring and economic activity.

June data showed relief, but annual inflation stayed elevated

The Bureau of Labor Statistics reported this week that the consumer price index fell 0.4% in June, the largest monthly decline since April 2020. Wholesale prices declined 0.3% in the same month. Lower oil prices contributed to both readings, and several other categories, including housing, also softened.

On a 12-month basis, however, the inflation measures remained above the Fed’s goal. Consumer prices were up 3.5% from a year earlier, and wholesale prices rose 5.5%, according to the Bureau of Labor Statistics figures cited in the reports. Inflation has exceeded the central bank’s target since early 2021.

“One month of relief is not enough. It is time to finish the job of restoring price stability,” Logan said. “In monetary policy as in hockey, you have to skate where the puck is going. Unfortunately, inflation does not appear to be headed sustainably back all the way to 2 percent.”

Logan said a range of standard and alternative inflation indicators, including measures that strip out housing, suggest price pressures remain too high even after the recent fall in energy costs and a fading impact from tariffs.

“If inflation is not heading all the way to 2 percent on its own, then at least some policy restriction is needed to help get it there,” she said. “If higher inflation becomes entrenched, we’d need sharper rate increases to bring it back to target, with a larger cost for the labor market. Better modest restriction now than severe restriction later.”

Markets see a later move as more likely

The FOMC is scheduled to meet July 28 and 29. Logan did not say she would seek a rate increase at that meeting, and she did not specify the size of any increase she would support.

Fed funds futures pricing tracked by CME Group’s FedWatch tool indicates markets expect a quarter-point increase later this year, with September possible and October priced as more likely. For the July meeting, traders assigned a 12.3% probability to a rate increase, according to the CME tracker.

Other Federal Reserve officials have indicated support for higher rates if inflation data fail to improve, but Logan’s comments represent one of the more explicit arguments for an increase tied to the current inflation outlook.

This story draws on original reporting from CNBC.