Possible Increase in Interest Rates Suggested by Dallas Fed President

Prepare for new insights about the Federal Reserve’s tools to guide interest rates.

For all the chatter and mysticism that surrounds the Federal Reserve and its immense power over the US economy, it really only has two tools to help guide the interest rates to where they need to be.

There’s the policy rate, which is what the Fed tells banks to charge each other for borrowing between each other’s excess funds held in government coffers. And then there’s the Fed’s communications, where its various leaders speak to reporters and other economic observers about the boring inner workings of their efforts toward the dual mandate of high employment and low inflation.

Lorie Logan, president of the Dallas branch of the Federal Reserve, was speaking Friday (Feb. 2) about a third tool that the Fed has, the size of its balance sheet, but that one hasn’t been as prominent in recent years. Logan was on the rate-setting Federal Open Markets Committee last year, when her words had more weight, but even though she’s rotated off the committee this year, her commentary is not nothing.

To start, she was upbeat about the state of the economy, which she sees as being on a path toward sustainable growth: “My business and community contacts consistently report that growth is settling down,” she said. “Not collapsing, not heading toward recession, but settling down.”

But she remains convinced that Wall Street is too eager to cut rates and reads too much into every release of economic data. (For now, many financiers are coming to the conclusion that they’re going to have to wait a little while for money to get cheaper.) Logan thinks that tight credit markets have done a lot to help bring down inflation by ratcheting up economic discomfort, or “bringing demand into line with supply.”

The ratio of job vacancies to unemployed workers has fallen, as has the rate of workers quitting their jobs. And wage growth appears to be somewhat more consistent with our 2 percent inflation target. Contacts tell me that applicant pools are growing, and job candidates’ salary expectations are moderating.

If the Fed cuts rates too soon, demand will pop back up and all that progress to bring inflation back down to 2% will have been for naught. So, she says, “we shouldn’t take the possibility of another rate increase off the table just yet.”

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