After the Federal Reserve decided this week to keep interest rates unchanged, two regional Fed presidents on Friday successively signaled further monetary tightening, indicating that some officials remain wary of inflation pressures.
Dallas Fed President Lorie Logan said the current economic outlook means the Fed needs at least two more rate increases, each of 25 basis points. She noted that skipping one policy meeting does not mean the ultimate goal of monetary policy has changed.
St. Louis Fed President Alberto Musalem argued that further tightening is necessary and should be carried out as soon as possible. He pointed out that the current level of interest rates remains accommodative, and inflation risks are tilted toward staying above the Fed's 2% target.
The remarks from the two officials underscore that the Fed's internal focus on the path ahead remains centered on how to control inflation. Earlier, the Fed voted 10-2 at this week's meeting to hold rates steady, pausing after a September hike to assess the economic situation and the effects of previous tightening.
Logan: At least two more hikes needed, but the pace can slow
Speaking at an event in Davidson, North Carolina, on Friday, Logan said that based on the current economic outlook, the Federal Open Market Committee (FOMC) needs to implement at least two more 25 basis point increases. But it can proceed gradually to help households, businesses, and markets adjust to rising rates.
She noted that skipping one meeting will not change the ultimate level monetary policy needs to reach.
However, Logan believes that after completing those two hikes, the Fed should pause, assess changes in the economic and financial environment, and then judge whether further increases are necessary.
She said the ultimate goal should be to adjust monetary policy to a mildly restrictive level so as to sustain price stability while achieving full employment.
It is worth noting that Logan had previously said the Fed may need two more hikes. Although she opposed the Fed's decision to hold rates steady in July this year, she supported the pause on Wednesday.
The Fed's economic projections released last month showed that most officials expected one more hike would still be necessary this year. With this week's decision now in place, investors are treating the final meeting of the year on December 8-9 as an important window for observing the next hike.
Musalem: Further hikes are necessary and should be implemented promptly
Speaking at a Shadow Open Market Committee event in New York on Friday, Musalem said further tightening is necessary to bring inflation back to the Fed's target and should not be delayed.
He noted that taking gradual policy adjustments earlier usually causes less disruption than being forced later to take larger and more abrupt actions.
Musalem argued that after the September hike, U.S. interest rates remain accommodative, and inflation risks are tilted toward staying above target. He also said that financial conditions have tightened recently, partly due to the Fed's policy actions, but the scale of this change is smaller than the adjustments seen after some previous major events. So far, inflation expectations remain stable.
Musalem said earlier this month that rates would need to keep rising over the next six to nine months to help curb high inflation.
Unlike Logan, Musalem does not have an FOMC vote this year. However, his assessment of the current rate level and inflation risks reflects that some regional Fed officials still favor a more restrictive monetary policy stance.
Inflation still above target, growth gives room for hikes
Behind the hawkish remarks from the two officials is the reality that U.S. inflation remains above the Fed's target and economic activity remains resilient.
Data released Thursday by the U.S. Bureau of Economic Analysis showed that the personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 3.6% year over year in September, well above the Fed's long-term 2% target.
Logan pointed out that inflation pressures are now broad across many goods and services, not merely the result of specific factors such as tariffs or higher energy prices. After the Iran war pushed up energy prices, related cost pressures are also transmitting into other parts of the economy.
At the same time, U.S. economic growth remains strong. Data released Thursday showed the U.S. economy grew in the third quarter at the fastest pace in a year, with business investment and household consumption together keeping activity solid.
Logan believes the U.S. labor market is broadly balanced but may be tightening slightly.
She also noted that the rise in long-term rates mainly reflects investors' expectations of improved growth prospects and a higher neutral rate. Therefore, higher market rates reflect more that investors believe the Fed still has work to do, rather than constituting an independent drag on economic growth.
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