Three Federal Reserve officials have once again emphasized the necessity of further interest rate increases, while simultaneously advocating for a gradual approach to tightening monetary policy in order to minimize disruption to financial markets and the U.S. economy.
Dallas Fed President Lorie Logan said on Friday: "Based on the current economic outlook, I still believe the Federal Open Market Committee (FOMC) will need to implement at least two more 25 basis point rate hikes." She also noted: "Adjusting monetary policy in a more gradual manner helps households, businesses, and market participants adapt to higher interest rates over time, and reduces the risk of an unnecessarily sharp deterioration in economic activity." Logan made these remarks during a speech at Davidson College.
Meanwhile, Richmond Fed President Tom Barkin and St. Louis Fed President Alberto Musalem expressed similar views. On Wednesday, the FOMC decided to keep the benchmark rate unchanged. Previously, the Fed voted to raise rates at its September meeting, the first increase since 2023.
Logan holds a vote on the Fed's rate-setting committee this year. She stated: "Skipping one meeting does not change the ultimate destination of monetary policy." Barkin said Friday in an interview with SiriusXM radio: "Taking a gradual approach is a good choice." Musalem, speaking at an event in New York, said: "Making gradual adjustments sooner rather than later is typically far less disruptive to the economy than waiting and then taking larger, more sudden actions."
In the economic projections released after the Fed's September meeting, most officials believed that one more rate hike might be necessary this year. According to market expectations reflected in futures contracts, investors currently believe the Fed will most likely raise rates again at its final meeting of the year, scheduled for December 8-9. The market also expects the Fed may pause again in January and then consider a third hike in March.
The comments from the three officials on Friday suggest that a consensus may be gradually forming within the Fed: further monetary tightening is still needed in the future, but it should be done in a step-by-step manner. It is worth noting that Logan voted this week to keep rates unchanged, after having opposed a similar pause in July. Barkin will regain his FOMC voting rights in 2027.
However, Wednesday's rate decision also saw two dissenting votes. Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack both advocated for a second consecutive month of rate hikes rather than holding rates steady.
Currently, the Fed is working to bring inflation down to its 2% policy target. For more than five years, U.S. inflation has remained above that goal. Data released on Thursday showed that the Fed's preferred inflation gauge accelerated to 3.6% in September, largely driven by another rise in international oil prices. A separate report released Thursday also showed that the U.S. economy grew at its fastest pace in a year during the third quarter, powered by strong growth in consumer spending and business investment. Among these, an investment boom related to artificial intelligence was a key factor driving business investment growth.
Barkin said: "If we see demand continuing to surge, that is precisely the kind of situation where monetary policy should step in to restrain it." Logan said that after her projected two additional rate hikes are completed, the Fed should pause, assess economic and financial market developments, and then decide whether further increases are necessary. She stated: "The ultimate goal should be to bring monetary policy to a moderately restrictive level that can sustainably achieve the dual objectives of full employment and price stability."
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