Dallas Fed President Logan: The Fed should "gradually" cut interest rates amid economic uncertainty

On Wednesday, Lorie Logan, President of the Federal Reserve Bank of Dallas, stated that as the Federal Reserve's policy normalizes from its highest level in over 20 years, she supports a gradual pace of interest rate cuts.

Logan mentioned that she continues to focus on the inflation and employment aspects of the Federal Reserve's dual mandate, and believes that there are still risks in the current U.S. economy, which justify a more cautious policy approach.

Tomorrow night, the U.S. CPI data for September will be released, which will be an important data point affecting interest rate cut expectations and the trend of U.S. stocks. Currently, the media generally expects the overall CPI for September to increase by 0.1% month-on-month, with the core CPI expected to increase by 0.2% month-on-month.

Uncertain Economic Outlook, Divergence in Interest Rate Cut Magnitude

Although not having a vote on monetary policy this year, Logan expressed support for the decision to lower borrowing costs at the central bank's September meeting. In September, the Federal Open Market Committee cut interest rates for the first time since the outbreak of the pandemic, with a larger-than-expected 50 basis points cut.

"Following last month's half-point cut in the federal funds rate, it may be appropriate to gradually restore a normal policy stance from now on, to best balance the risks to our dual mandate goals."

Currently, there is divergence regarding the magnitude of future interest rate cuts. More than half of the Fed officials believe that there should be a further 50 basis points cut this year, which means the Fed would cut rates by 25 basis points at each of the remaining two meetings. Seven officials support only one rate cut of 25 basis points, while two officials expect no further cuts.

Logan agreed with the easing of inflation and noted that deflation is a common phenomenon. Despite some cooling in the labor market, it remains healthy. She added that monetary policy remains restrictive and is likely to continue to weigh on demand for housing and other services.

"Inflation and the labor market are just a step away from our target. Easing policy will help prevent an excessive cooling of the labor market, thereby bringing the inflation rate back to target in a sustainable and timely manner."

However, she pointed out that there are various uncertainties in the outlook, and there are still some upside risks to inflation, hence the need to cut interest rates at a more cautious pace.

"I still believe that the inflation rate may stay above our 2% target, which is a significant risk."