US Federal Reserve will need to raise short-term borrowing costs by at least another half of a percentage point to turn monetary policy "modestly restrictive" and get inflation back on track to the Federal Reserve's 2 per cent goal, Dallas Fed President Lorie Logan said on Thursday. The Fed's quarter-point policy rate increase last month, to its current range of 3.75 per cent-4.00 per cent, was "an important first step" in tightening policy, Logan said in remarks prepared for Texas business executives and community leaders at the regional Fed bank's headquarters.
"Still, I currently estimate the target range needs to rise an additional 50 basis points or more to appropriately balance the outlook and risks for our dual mandate goals," she said. "We must restore price stability."
The economy is strengthening and the labor market is well balanced, she said. And though inflation is falling as transitory factors fade, it does not look like it will go much lower than 2.5 per cent without further rate hikes.
"A few additional increases in the target range would undo the FOMC’s risk management cuts from last fall," Logan said, referring to the Fed's policy-setting Federal Open Market Committee, which cut the policy rate 75 basis points over the final three meetings of last year.
Higher Bond Yields
Logan's remarks came on a day that the benchmark 10-year Treasury note yield touched a 24-year high before falling back to around 5.24 per cent.
Higher long-term bond yields show market participants expect strong economic growth and a higher Fed policy rate, Logan said, though they may also reflect higher term premiums, which "can slow the economy, reducing the need to tighten monetary policy."
The exact level of the policy rate that will be needed to create some restriction is uncertain, she said, and changes over time depending on the broader financial environment.
"I will continue to watch labor markets, prices, growth, consumption and financial conditions to evaluate whether policy is becoming restrictive."
Federal Reserve Bank of New York
On Tuesday, Federal Reserve Bank of New York President John Williams said the central bank had time to weigh the data before deciding when to hike interest rates again.
Rate futures markets now reflect about a 38 per cent probability of a quarter-percentage-point rate hike in October, according to CME Group's FedWatch Tool, from roughly 51 per cent in the prior session and nearly 71 per cent a week ago.
Market participants are focused on the crucial US nonfarm payrolls report for September that is due on Friday.
Goldman Sachs Predictions
Goldman Sachs pushed its forecast for the next US interest rate hike to December after a softer-than-anticipated inflation reading cooled expectations the Federal Reserve would hike rates again in October. The brokerage had previously forecast a 25-basis-point increase in October.
"We are pushing back the second hike in our forecast to December, and we see a strong chance that the FOMC will ultimately conclude that additional rate hikes are unnecessary," Goldman Sachs said in a note on Wednesday.
The Fed raised rates in September, marking its first hike in three years and the first policy move under new chief, Kevin Warsh, in a bid to tackle inflation.
