Tighter financial conditions could leave less for Fed to do, Logan says
DALLAS (Reuters) — The recent rise in long-term U.S. Treasury yields and tighter financial conditions more generally could mean less need for the Federal Reserve to raise interest rates further, Dallas Fed President Lorie Logan said on Monday.
«I expect that continued restrictive financial conditions will be necessary to restore price stability in a sustainable and timely way,» Logan, one of the Fed's more hawkish policymakers, said in prepared remarks to the National Association for Business Economics. «I remain attentive to risks on both sides of our mandate. In my view, high inflation remains the most important risk. We cannot allow it to become entrenched or reignite.»
Since the U.S. central bank last raised its policy rate to the 5.25%-5.50% range in July, long-term Treasury yields have risen sharply, making borrowing more expensive and acting as a brake on what has been surprisingly strong economic growth and job gains.
How much more the central bank's policy-setting Federal Open Market Committee (FOMC) will need to do, Logan said, will depend crucially on how much of the recent tightening in financial conditions is due to expectations about the economy versus the compensation investors demand for holding longer-term U.S. debt, the so-called «term premium.»
«If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate,» Logan said. «However, to the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more.»
Higher term premiums play a «clear role» in the rise in long-term yields, Logan said, citing the results of surveys, models, and her own assessment of investor expectations that the Fed
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