Dallas Federal Reserve Chairman Lorie Logan said on Thursday that the inhibitory effect of high interest rates on the economy may not be as significant as policymakers expected, and he emphasized the importance of officials leaving room for future adjustments.
She said at an event, "It's also possible that the policy may not be as strict as we thought, relative to pre pandemic interest rate levels. It's important to keep all options on the table and maintain flexibility."
Cutting interest rates too early
Logan reiterated her comment earlier this month that it was too early to consider lowering interest rates now.
Since July last year, Federal Reserve officials have maintained interest rates in the range of 5.25% to 5.5%, the highest level in 20 years. Many policymakers have stated that they need to see more data to be confident that inflation will return to the central bank's target of 2%. The Federal Open Market Committee (FOMC) will hold its latest meeting from June 11th to 12th.
The higher than expected inflation data at the beginning of this year suppressed market expectations for the Federal Reserve's interest rate cut this year. According to the CME Federal Reserve observation tool, the market currently expects the Federal Reserve to only cut interest rates once this year, and the first cut has been postponed from March to November. Some policymakers even suggest that the possibility of further interest rate hikes should not be ruled out.
On the other hand, regarding inflation, Logan said, "We have ample reason to believe that we are moving towards the 2% target, or that we are still on this path, perhaps slower than we imagined at the beginning of this year, and there is still a lot of uncertainty."
The April PCE, a favored inflation indicator by the Federal Reserve, will be released on Friday evening Beijing time. Logan stated that Federal Reserve officials have time to observe upcoming data and evaluate the evolution of financial conditions. She had previously emphasized that the financial environment should not be relaxed too early.
Neutral interest rate increase
At present, despite high interest rates and strong employer recruitment, the strong performance of the US economy has led some policymakers to question how much impact their policies have on price pressures.
Logan pointed out that the so-called neutral interest rate (a level of interest rate that neither stimulates nor drags down the economy) may have risen, which has intensified the broader debate on this topic. Logan pointed out that an increase in investment demand from energy transformation, artificial intelligence, and other areas may lead to an increase in neutral interest rates.
"There are some good reasons to believe that this (neutral interest rate) is higher than before the outbreak of the epidemic," she said.
In contrast, John Williams, the "third in command" of the Federal Reserve and Chairman of the New York Fed, stated that he saw "ample evidence" that policies were restrictive and hinted that he did not believe neutral interest rates had risen.