Federal Reserve's Logan: Inflation cooling may not trigger rate cuts, labor market becomes key indicator

According to the Zhitong Finance APP, Dallas Federal Reserve President Lorie Logan stated on Thursday that even if the inflation rate approaches the Federal Reserve's target of 2%, she is still prepared to maintain the current interest rates for "a considerable period of time" as long as the labor market remains stable. She pointed out that the coexistence of slowing inflation and a strong labor market may indicate that monetary policy has not reached a substantial tightening level.

In her speech at the Bank for International Settlements conference in Mexico City, Logan stated that while this combination is good news, "it does not necessarily mean that the Federal Reserve will cut rates soon." On the contrary, she believes this "strongly indicates that we are close to the neutral interest rate, and there is limited room for further rate cuts in the short term."

However, she also mentioned that "if the labor market or demand cools further, it may be time to consider easing policy."

Last week, the Federal Reserve decided to keep the short-term policy interest rate in the range of 4.25%-4.50% due to inflation declining at a slower pace than expected. Chairman Powell stated that the Federal Reserve is not in a hurry to cut rates further and emphasized that a further cooling of inflation or weakness in the labor market would prompt policy easing.

According to the Federal Reserve's measure, the 12-month change in the personal consumption expenditures price index, the U.S. inflation rate actually rose at the end of last year, reaching 2.6% in December.

Logan is skeptical about cutting rates solely due to improvements in inflation, which makes the market pay more attention to the still strong labor market, with the unemployment rate slightly dropping to 4.1% last month.

The U.S. Department of Labor will release January employment data on Friday, with economists expecting job growth to slow but not collapse.

Trump's Policies

Logan also pointed out that there are a range of uncertainties that could affect the Federal Reserve's policy path, including the trade policies of the Trump administration and the volatile financial environment.

She stated, "For me, the monetary policy implications of these uncertainties mainly boil down to whether sustainable restoration of price stability requires keeping interest rates at least at current levels or further lowering them."

Logan participated in a panel discussion at the conference hosted by the Bank for International Settlements, alongside the governors of the Bank of Canada, the Bank of Mexico, and the Central Bank of Colombia. Policymakers from the Bank of Canada and the Bank of Mexico (the two major trading partners of the U.S.) both indicated that potential new policies from the Trump administration have increased uncertainty about the future economic paths of their countries.

Bank of Mexico Governor Victoria Rodriguez stated that she and her colleagues will consider a significant rate cut at their next meeting. Earlier, the Bank of Mexico announced a substantial rate cut of 50 basis points on Thursday morning, citing the U.S. delay in imposing a 25% tariff on Mexican goods. She noted that Mexican policymakers are still closely monitoring the uncertainties brought about by potential changes in U.S. trade policy.

Bank of Canada Governor Tiff Macklem reiterated that the threat of tariffs has affected the confidence of Canadian businesses and households. He also mentioned that in the event of a potential trade dispute, the central bank faces challenges in adjusting policies to support the economy. Officials cannot "simultaneously respond to declining output and rising inflation," and must assess the downward pressure on inflation from reduced economic activity against the upward pressure from rising input costs and supply chain issues McClellan and Rodriguez both pointed out that tariffs often reduce economic efficiency and may lead to a slowdown in productivity growth.

Logan from the Dallas Federal Reserve emphasized the importance of anchoring inflation expectations and noted that survey indicators measuring inflation uncertainty remain elevated after rising during the pandemic. She stated, "While a return to the lower bound is a scenario we need to prepare for, recent experience suggests that when interest rates are well above zero and inflation risks are to the upside, we must also be fully prepared to achieve our goals."