Federal Reserve Bank of Dallas president Lorie Logan said she supports a slower path of interest-rate reductions as the central bank normalises policy away from its highest level in more than 20 years.

Logan said she remains focused on both the inflation and employment sides of the Fed’s dual mandate and outlined several risks in the economic outlook that justify a more measured approach to policy. While she doesn’t vote on monetary policy this year, Logan said she supported lowering borrowing costs at the central bank’s September meeting.

“Following last month’s half-percentage-point cut in the fed funds rate, a more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals,” Logan said on Wednesday in prepared remarks for an event in Houston. 

The Federal Open Market Committee (FOMC) last month lowered rates for the first time since the onset of the pandemic, cutting by a larger-than-normal 50 basis points amid signs of weakening in the labour market and as inflation cooled towards the Fed’s 2% target. 

A narrow majority of Fed officials penciled in another half point of cuts this year, implying a quarter-point reduction at each of their two remaining meetings. Seven officials supported just one additional 25-basis-point cut and two projected that no further reductions would be needed.

Logan, who last spoke publicly about the economy and monetary policy in June, lauded the continued drop in price pressures, saying disinflation has been broad based. The labour market, despite some cooling, remains healthy, she added. 

Monetary policy is still restrictive, Logan said, and should continue to weigh on demand for housing and other services.

“Inflation and the labour market are in striking distance of our goals rather than seriously overheated,” Logan said. “Less-restrictive policy will help avoid cooling the labour market by more than is necessary to bring inflation back to target in a sustainable and timely way.”

But she cited various uncertainties in the outlook for each as reason to cut rates at a more measured pace.

Some upside risks to inflation remain, with consumer spending and economic activity still robust, Logan said, and further easing in financial conditions could boost aggregate demand.

“I continue to see a meaningful risk that inflation could get stuck above our 2% goal,” she said.

The Dallas Fed chief also cited measurement issues that make deciphering the labour market more complicated right now. Data revisions, faster immigration, natural disasters and strikes, including a recent action by dock workers on the East and Gulf coasts, all muddy the workforce picture. 

“These risks suggest the FOMC should not rush to reduce the fed funds target to a ‘normal’ or ‘neutral’ level but rather should proceed gradually while monitoring the behavior of financial conditions, consumption, wages and prices,” Logan said.

Logan repeated that the neutral level of interest rates, where they neither weigh on nor stimulate the economy, may be higher now amid increased investment and potentially higher productivity growth. Moving more slowly would allow policymakers to better feel out where exactly neutral is.

“In this uncertain environment, lowering the policy rate gradually would allow time to judge how restrictive monetary policy may or may not be and reduce the risk of inadvertently boosting inflation by bringing the policy rate below its neutral level,” Logan said.

Other policymakers have similarly argued for moving at a slower pace, and Fed chair Jerome Powell urged against assuming the Fed would continue cutting in such large increments. A labour market report released last week showed strong hiring in September and drove down market bets on a larger cut at the Fed’s next meeting in November. Markets now expect a quarter-point cut, followed by another such move in December.

  - Bloomberg