“Assessing Financial Conditions: Are They Tight Enough?” By Reuters

By Ann Saphir

Dallas Federal Reserve Bank President Lorie Logan expressed support on Tuesday for the decision to keep the Fed’s policy rate unchanged last week. She emphasized the importance of evaluating whether financial conditions are sufficiently stringent to address ongoing inflation concerns, noting that recent indicators suggest the battle against inflation is far from over.

During a conference focused on energy, Logan highlighted that inflation remains elevated and mentioned a trend suggesting it is moving towards 3%, rather than the Fed’s target of 2%. She remarked that although the labor market has shown some signs of cooling, it remains "too tight."

Long-term bond yields have risen significantly since the Fed last adjusted the short-term policy rate in July, but they have since retraced some of those gains following last week’s decision. Logan stated, "We will continue to require tight financial conditions to bring inflation down to 2% in a timely and sustainable manner." She added that she will be closely monitoring data and financial conditions in the lead-up to the next meeting.

The Federal Reserve’s next meeting is scheduled for next month. As of September, many Fed policymakers anticipated that an additional rate hike would be necessary to reduce inflation, which has remained at 3.4% according to the Fed’s preferred gauge for several months.

Logan was among the initial central bankers to suggest that the increase in the yield of the 10-year Treasury note, combined with other indicators of tighter financial conditions, might slow economic growth sufficiently to negate the need for further rate hikes.

This perspective played a significant role in the decision to maintain the policy rate within the current range of 5.25%-5.50%. Should long-term bond yields remain elevated and indicate that investors demand greater compensation for holding long-term debt, the Fed may be able to sustain its current rates. This approach could potentially slow investment and alleviate inflationary pressures, as discussed by Logan and others.

However, if the rise in yields is a signal of accelerating economic growth and an expectation that the Fed will need to raise rates in response, then the central bank will have to meet that expectation, according to Logan. She remarked, "We have observed some retraction in the 10-year yield and financial conditions, and I will be monitoring whether this trend continues and what it implies for policy."