Dallas Fed President: Expects to expand the balance sheet again soon, December rate cut is difficult, asset valuations are relatively high
The President of the Federal Reserve Bank of Dallas, Lorie Logan, who previously worked in the market operations department of the New York Federal Reserve, recently stated that she expects the balance sheet to be expanded again soon. She reiterated the call to slow down on further interest rate cuts, stating that it is likely necessary for the Federal Reserve to remain on hold at the December meeting. She mentioned that high asset valuations and narrowing credit spreads not only imply that the policy may not be particularly tight but also indicate that the federal funds rate needs to offset the tailwinds brought by the current financial environment
Lorie Logan, President of the Federal Reserve Bank of Dallas, recently stated that she expects the balance sheet to be expanded again soon. She reiterated the call to slow down on further interest rate cuts: to avoid a forced reversal after overly loose policies, it is likely necessary for the Federal Reserve to hold steady and maintain interest rates at the December meeting.
Logan said at an event in Zurich on Friday:
"After two rate cuts have already been implemented, I would find it difficult to support another rate cut in December unless there is clear evidence that inflation is falling faster than expected or the labor market is cooling more rapidly. If there is not enough clear evidence to justify further easing, maintaining rates at current levels for a period of time will allow the Federal Open Market Committee (FOMC) to better assess the extent of current policy constraints."
"If the previous rate cuts prove to be a policy mistake and need to be reversed, it could trigger 'unexpected financial and economic volatility.'"
"The current level of interest rates may not significantly suppress the economy, and it may be necessary to continue applying pressure to mitigate the impact of the rapidly rising stock market. High asset valuations and narrowing credit spreads not only suggest that policy may not be particularly tight, but also indicate that the federal funds rate needs to offset the tailwinds from the current financial environment."
Logan's remarks echo her comments from last month.
Federal Reserve officials have lowered interest rates at the last two meetings, having cumulatively cut rates by 1 percentage point in the last few months of 2024. They are now deeply divided on whether to cut rates again in December. Some officials are concerned that inflation remains significantly above the 2% target; others believe that with weak hiring, the risks in the labor market are greater.
These concerns have led investors to lower their expectations for a rate cut in December. However, John Williams, President of the New York Fed, stated earlier on Friday that he believes there is still room for rate cuts in the near term, which has pushed market expectations for a December rate cut back up.
Logan previously worked for a long time in the market operations department of the New York Fed. She indicated that the Federal Reserve may soon need to resume asset purchases to ensure smooth functioning of the funding markets. Policymakers announced in October that they would stop shrinking the balance sheet starting next month, as these markets are under pressure:
"I expect that it won't be long before we reach a point suitable for resuming balance sheet expansion, in order to keep money market rates averaging close to but slightly below the interest on excess reserves (IORB). Those reserve management purchases will be technical operations and do not represent a change in policy stance."
