by Catarina Saraiva
Federal Reserve Bank of Dallas President Lorie Logan signaled it may take a while before officials know how the economy will respond to tariffs and other policy changes and thus how they should adjust interest rates.
In prepared remarks for an event in Waco, Texas on Thursday, Logan outlined a variety of risks to the economic outlook.
Tariffs could drive up price growth — temporarily or more persistently should inflation expectations rise. Fiscal policy or regulatory changes could boost demand, but economic uncertainty and market volatility may also cause a pullback among consumers and businesses, weighing on growth.
“For now, with the labor market holding strong, inflation trending gradually back to target, and risks to the FOMC’s objectives roughly balanced, I believe monetary policy is in a good place,” Logan said, referring to the interest-rate setting Federal Open Market Committee.
“It could take quite some time to know whether the balance of risks is shifting in one direction or another,” she added.
The Fed has left interest rates unchanged at each of its three meetings so far this year and is expected to do so again when officials gather in June. Minutes from policymakers’ May 6-7 meeting showed officials broadly agreed that heightened economic uncertainty meant they should remain patient in adjusting borrowing costs.
Last month, when the Trump administration had initially announced higher-than-expected tariffs on US trade partners, Logan said they would likely drive up prices and unemployment. Many tariffs have been paused or temporarily reduced as the administration negotiates deals with countries.
The latest de-escalation between the US and China has renewed optimism among consumers, with confidence rebounding this month after dropping to nearly a five-year low in April, according to data released earlier this week. At the same time, continuing claims for unemployment insurance benefits have climbed to the highest level since 2021, increasing concern that the unemployment rate may rise.
Fed officials have expressed concern that tariffs may put them in the tough spot of having to choose between keeping rates high to cool renewed inflationary pressures or lowering them to bolster a flagging economy.
Logan emphasized on Thursday that the economic outlook is hard to forecast right now. She also sounded a warning on the effects of higher inflation expectations.
“If expectations of higher inflation became entrenched, inflationary pressures could persist and become very costly to reverse,” she said.
Logan also spoke about central bank independence, a topic that has resurfaced recently with Trump’s repeated pressure on the Fed and Chair Jerome Powell to lower rates.
“Research shows that central banks perform better on inflation when they are independent from short-term political considerations,” Logan said. “The pattern is clear around the world and over history.”
Copyright Bloomberg News
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