US may need more slack in job market to hit 2% inflation: Fed’s Logan

The US labour market likely needs to weaken further for the Federal Reserve to achieve its 2 per cent inflation target, as prices are rising even faster without factoring in the impact of new import tariffs, Dallas Fed President Lorie Logan said on Tuesday.

Logan urged caution in making further interest rate cuts, while being bullish on the economy but hawkish about persistent inflation risks.

Current monetary policy is putting only modest pressure on an economy in which consumption remains “resilient,” asset values are high and sentiment seems to be rebounding, she said in comments prepared for delivery at a Dallas Fed event.

“A modest further increase in labour market slack is likely necessary to finish restoring price stability,” Logan said. “I will be cautious about further rate cuts. It is critical for the FOMC to keep its commitment to deliver 2 per cent inflation,” she added, referring to the US central bank’s policy-setting Federal Open Market Committee.

The Fed lowered its benchmark interest rate by a quarter of a percentage point to the 4 per cent to 4.25 per cent range on Sep 17, and indicated more cuts would follow at meetings in October and December.

While there has been much focus on the impact import taxes may or may not have on prices, Logan said her staff estimates that prices outside of goods and housing are rising fast enough to keep inflation as high as 2.4 per cent.

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Coupled with steady demand and financial conditions she feels are adding to growth, Logan said the Fed needs to keep policy tight enough to restrain the economy and create more labour “slack” through rising unemployment, a decline in hours worked, or other labour market margins.

“The state of the economy and financial conditions indicate to me the stance of monetary policy is only modestly restrictive,” Logan said, noting that she supported the recent quarter point rate cut to insure against a steep rise in unemployment.

However, she said it is unclear how much further the Fed can ease policy given that the current policy rate of 4 per cent to 4.25 per cent is already at the upper range of estimates of the “neutral” rate that neither boosts nor discourages spending and investment.

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“There may be relatively little room to make additional rate cuts without inadvertently moving to an inappropriately accommodative stance,” Logan said. REUTERS