Dallas Fed’s Logan cites neutral rate uncertainty as reason to ‘proceed cautiously’ on rate cut

Lorie Logan, president of Dallas Fed, expressed worry about uncertainty surrounding the exact level of neutral rate of interest and hinted at the risk that the Federal Reserve’s policy rate might already near the point which further rate cut can start to fuel inflation again, in a speech to an energy conference on Wednesday.

Logan cited two point estimates of the neutral real interest rate, published by New York Fed and Richmond Fed, indicating that the rate could range from 0.74% to 2.6% in real terms; or, 2.74 to 4.6% in nominal terms after taking the central bank’s 2% inflation target into account. That upper estimate already exceeded last week’s Fed fund rate of 4.58%.

“[W]hen policymakers look at mid-range estimates that suggest there’s meaningful room to cut before reaching neutral, I think we should recall the technique of a ship captain whose depth finder might mistake mud for water,” Logan noted, saying the central bank should “proceed cautiously” when cutting rate further and that a below-neutral level of interest rate could reignite inflation in the US.

Logan also mentioned potential upside risk to inflation — stemming from a “possible post-election surge” in business investment and potential supply chain disruptions and geopolitical developments — as well as downside risk to employment resulted from tightened financial conditions as factors that she is keeping an eye on.