Fed’s Logan backs two further rate hikes, says pause will not change course

Further monetary tightening remains necessary, with “at least two more quarter-point rate hikes” needed, Dallas Federal Reserve President Lorie Logan said on Friday. While skipping a hike “doesn’t change policy destination,” she said, moving interest rates “gradually” lowers the risk of a sharp deterioration in the economy.

Describing the rise in inflation as “unacceptable”, Logan said that once rates had been increased by 50 basis points, “a pause would make sense” to assess the next steps.

What Are the Key Takeaways?

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

At least two further quarter-point rate increases are needed from the Fed

The policy destination remains unchanged if a meeting is skipped

The risk of a sharp economic downturn can be reduced through gradual policy adjustments

Households, businesses and investors can adapt to higher rates more easily when policy changes are gradual

A modestly restrictive policy stance remains the ultimate objective

Clarity on the destination for policy rates helps the economy adjust and realise the benefits of skipping a hike

Inflation's failure to move back towards the Fed's 2% target is 'Unacceptable'

A pause following 50 bps of rate increases would make sense to assess what additional action is appropriate

The economy is receiving support from financial conditions

Higher market rates signal investors' belief that monetary policy still has work to do

Despite rising, long-term rates are exerting less of a drag on the economy than might be expected

Consumer spending remains solid alongside strong economic growth

The labour market remains balanced, although it may be tightening slightly

Common Questions About the Fed

How Does the Federal Reserve's Role Affect the US Dollar?

Interest-rate adjustments are the Federal Reserve's (Fed) main means of pursuing its two mandates: stable prices and full employment. As the institution responsible for US monetary policy, the Fed uses these changes to influence economic conditions. If prices climb too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Borrowing then becomes more expensive across the economy, while higher rates make the US a more attractive destination for international investors' funds, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates. Such cuts encourage borrowing but put pressure on the Greenback.

How Frequently Does the Fed Meet to Decide Monetary Policy?

At eight policy meetings each year, the Federal Open Market Committee (FOMC) reviews economic conditions and decides monetary policy for the Federal Reserve (Fed). Twelve Fed officials participate in the FOMC: all seven Board of Governors members, the president of the Federal Reserve Bank of New York and four presidents drawn from the other eleven regional Reserve Banks. The latter four serve rotating one-year terms.

How Does Quantitative Easing (QE) Work, and What Does It Mean for USD?

When a financial system is struggling to function, the Federal Reserve may take the exceptional step of using Quantitative Easing (QE) to substantially expand the flow of credit. This unconventional policy is deployed during crises or periods of extremely low inflation. During the Great Financial Crisis in 2008, it was the Fed's preferred response. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions, a process that usually weakens the US Dollar.

Why Does Quantitative Tightening (QT) Usually Support the US Dollar?

By reversing QE, Quantitative Tightening (QT) generally supports the US Dollar's value. Under QT, the Federal Reserve ceases purchasing bonds from financial institutions and, as bonds in its portfolio mature, does not reinvest the principal in new bonds.