Fed’s Logan Turns Hawkish: Another 50 Basis Points Rate Hike May Be Needed, But Bond Market May Have Already Tightened

According to Jinse Finance APP, Dallas Federal Reserve President Lorie Logan stated that the Federal Reserve must continue raising rates to thoroughly suppress inflation and hinted that the rising yields on U.S. Treasury bonds may also help slow down the economy.

“I currently estimate that the target range needs to be raised by another 50 basis points or more to appropriately balance the economic outlook and various risks related to our dual mandate goals,” Logan said in prepared remarks at a Dallas Fed event on Thursday.

Before joining the Dallas Fed, Logan worked for more than two decades in the markets division of the New York Federal Reserve. She also noted that U.S. Treasury yields have risen in recent weeks. She said that market participants told her this initially stemmed from expectations of robust growth and a higher neutral rate for the Fed, but models now show that term premium—the additional return investors require for holding longer-term bonds over shorter-term bonds—is also increasing.

“A higher term premium can slow the economy, thus reducing the need for tightening monetary policy,” Logan said. This year, she is a voting member of the Federal Open Market Committee, which determines the Fed's interest rate policy.

Affected by the stalling progress in cooling inflation, policymakers raised rates by 25 basis points at the September meeting—the first hike in three years. At that meeting, the median expectation among officials indicated at least one more rate hike this year. The bond market has continued to sell off this year, with the 30-year yield rising by 64 basis points, or 0.64 percentage points, since June.

This week, some of Logan’s colleagues said that the Fed can afford to be patient and time the next rate hike carefully. Vice Chair Philip Jefferson and New York Fed President John Williams—who, along with Chair Kevin Walsh, are sometimes referred to as the Fed’s “Big Three”—said that the Fed can wait to see how data evolves in the coming weeks before making policy decisions.

These comments have weakened market expectations for a rate hike at the Federal Reserve meeting on October 27-28. According to the pricing of federal funds futures contracts, investors now see only a 28% chance of a rate hike next month, compared with 70% earlier this week. After this month, Fed officials will meet again in December.

In a 2023 speech, Logan detailed the various U.S. Treasury market models she considers. She stated that she will continue to monitor yield movements and indicators in other dimensions of the economy to assess what interest rate level will have a dampening effect on the economy.

Logan referenced the Federal Reserve’s cumulative 75 basis point rate hikes last year and said: “At a minimum, the policy rate range still needs to be raised several times to offset the impact of the rate cuts the FOMC took last fall out of risk considerations. But the ultimate goal should be to make policy moderately restrictive and put the economy on a sustained path to full employment and price stability.”