By Michael S. Derby
NEW YORK (Reuters) -Federal Reserve Bank of Dallas President Lorie Logan said on Thursday that recent data and higher bond market borrowing costs give the central bank space to deliberate on its next monetary policy move.
"We have some time" before having to make the call whether to raise rates again or hold them steady, Logan said at a gathering of the Money Marketeers of New York University, citing a desirable tightening in financial conditions, in part reflecting the tightening in monetary policy.
Logan acknowledged progress in lowering inflation while still being unsure that price pressures are ebbing to the Fed's 2% target. She said a still-strong job market may need to weaken further to help the Fed achieve its inflation goals.
Earlier on Thursday, Fed Chairman Jerome Powell told a New York audience that while more rate hikes may be needed if the economy doesn’t cool, a rise in real-world borrowing costs generated by the jump in Treasury yields may provide enough restraint to save the Fed from having to raise rates again.
The Fed's next policy meeting is set for Oct. 31-Nov. 1, and financial markets are virtually certain officials will again refrain from increasing rates, after leaving rates steady at their September meeting, at between 5.25% and 5.5%.
While the cooling inflation pressures have taken pressure off the Fed to increase rates further, officials penciled in one more increase before the end of the year at their policy meeting last month.
Since then, a number of Fed officials have said rates are at or near the peak, while some have said outright they don’t see another need for a fed funds rate increase short of renewed inflation pressures.
"My focus is on price stability and what further tightening may be needed to achieve our mandate," Logan said.
She added that as she seeks to understand how much of the rise in yields reflects markets' adjusting to a stronger economic outlook or whether they're adjusting to a bigger need to be paid for taking on risk, it's possible that markets will take some pressure off monetary policy.
If tighter financial conditions are "persistent that could mitigate some of the need for further increases," Logan said.
In her remarks Logan also took stock of the outlook for the Fed's balance sheet contraction policy. The Fed is allowing just shy of $100 billion per month in Treasury and mortgage bonds it owns to mature and not be replaced, in a process that has thus far caused central bank holdings to fall by about $1 trillion since the summer of 2022.
Logan said the Fed's reverse repo facility, which currently is taking in just over $1 trillion from eligible financial firms, will likely need to fall to nearly zero before the Fed can determine if there are enough reserves in the system to end its balance sheet drawdown.
Logan also said that the recent jump in bond yields has appeared to be orderly. She said the Fed has tools in place to deal with market stress if it arrive, such as the Standing Repo Facility, which can quickly convert Treasury holdings into cash for eligible financial firms.