Fed's Logan Takes Hawkish Stance: Another 50 Basis Points or More of Rate Hikes Needed, but the Bond Market May Have Already "Done the Tightening"

Dallas Fed President Lorie Logan said the Federal Reserve must keep raising interest rates to fully crush inflation, and suggested that rising U.S. Treasury yields may also help slow 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 risks associated with our dual mandate goals," Logan said Thursday in prepared remarks for an event at the Dallas Fed. Before joining the Dallas Fed, Logan worked for more than two decades in the markets division of the New York Fed. She also noted that U.S. Treasury yields have climbed in recent weeks. She said market participants told her this initially stemmed from expectations of a higher neutral rate for the Fed, but models now show that the term premiumthe extra return investors demand for holding longer-term bonds rather than shorter-term onesis also rising. "A higher term premium can slow the economy, thereby reducing the need for monetary policy tightening," Logan said. She is a voting member this year on the Federal Open Market Committee, the Fed's rate-setting body. With the disinflation process stalling, policymakers raised rates by 25 basis points at their September meeting, the first hike in three years. At that meeting, the median projection of officials showed at least one more increase this year. The bond market has been selling off throughout the year, with the 30-year yield up 64 basis points, or 0.64 percentage point, since June. This week, some of Logan's colleagues said the Fed can afford to be patient and wait for the right moment to deliver its next rate hike. Vice Chair Philip Jefferson and New York Fed President John Williamswho along with Chair Kevin Warsh are sometimes called the Fed's "troika"said the Fed can wait to see how data evolve in the coming weeks before making a policy decision. Those remarks dampened market expectations for a rate hike at the Fed's Oct. 27-28 meeting. Based on pricing of federal funds futures contracts, investors now see only a 28% chance of a hike next month, down from 70% earlier this week. After this month, Fed officials will meet again in December. Logan, who detailed the various Treasury market models she references in a 2023 speech, said she will continue to monitor yield movements and other dimensions of the economy to assess what level of interest rates will have a somewhat restraining effect on the economy. Logan referenced the Fed's cumulative 75 basis points of rate hikes last year and said: "At a minimum, the policy rate range will need to be raised several more times to offset the effects of the FOMC's risk-management cuts last fall. But the ultimate goal should be to make policy moderately restrictive and put the economy on a path to sustainably achieving full employment and stable prices."