Federal Reserve Officials Turn Hawkish: Logan Expects at Least Two More Rate Hikes, Musalem Calls for Swift Action

After the Federal Reserve decided to keep interest rates unchanged this week, two regional Fed presidents signaled further tightening of monetary policy on Friday, indicating that some officials remain vigilant about inflationary pressures.

Dallas Fed President Lorie Logan stated that the current economic outlook means the Fed still needs to raise rates at least twice more, with each hike of 25 basis points. She emphasized that skipping a meeting does not alter the ultimate objectives of monetary policy.

St. Louis Fed President Alberto Musalem, on the other hand, believes that additional tightening of monetary policy is necessary and should be implemented without delay. He pointed out that the current rate level remains accommodative, and inflation risks are likely to remain above the Fed's 2% target.

The views expressed by both officials highlight that the Fed's internal focus on future policy continues to center on controlling inflation. Previously, at this week’s meeting, the Fed decided by a vote of 10 to 2 to keep interest rates unchanged, pausing after a hike in September to assess economic conditions and the effects of prior tightening.

Logan: At least two more hikes are needed, but the pace can be slowed

During a speech in Davidson, North Carolina on Friday, Logan said that based on the current economic outlook, the Federal Open Market Committee (FOMC) still needs to implement at least two more 25 basis point hikes. However, she added, this can be done gradually to help households, businesses, and markets adapt to rising rates.

She noted that skipping a meeting does not change the end goal that monetary policy ultimately needs to achieve.

However, Logan believes that after completing these two hikes, the Fed should pause to reassess economic and financial changes before determining whether further rate increases are necessary.

She added that the ultimate objective should be to adjust monetary policy to a moderately restrictive stance, so that price stability is continuously maintained while achieving full employment.

It is worth noting that Logan had previously indicated that the Fed might need to hike rates twice more. Although she opposed the Fed's decision to keep rates unchanged in July this year, she supported the decision to pause hikes this Wednesday.

According to the economic projections released by the Fed last month, most officials still expected one more rate hike to be necessary this year. With this week's decision now implemented, investors are focusing on the last FOMC meeting of the year on December 8-9 as a key window to observe the possibility of another rate hike.

Musalem: Further rate hikes are necessary and should be implemented as soon as possible

Speaking at the Shadow Open Market Committee event in New York on Friday, Musalem said that further tightening of monetary policy is necessary to bring inflation back to the Fed’s target, and this should not be delayed.

He noted that adopting gradual policy adjustments earlier usually causes less disruption than dramatic, sudden actions that may be required later.

Musalem believes that even after the September hike, U.S. interest rates remain accommodative, and inflation risks are still inclined to exceed the target.
He added that recent financial conditions have tightened, in part due to Fed policy actions, but the magnitude of this change has been smaller than adjustments following some major past events. So far, inflation expectations remain stable.

Earlier this month, Musalem also stated that rates would need to keep rising over the next six to nine months to help curb high inflation.

Unlike Logan, Musalem does not hold an FOMC voting right this year. However, his assessment of the current rate stance and inflation risk reflects that some regional Fed officials still favor a more hawkish monetary policy approach.

Inflation remains above target; economic growth provides room for rate hikes

Behind these hawkish statements is the reality that U.S. inflation persists above the Fed’s target while economic activity remains resilient.

Data released Thursday by the U.S. Bureau of Economic Analysis showed that the Fed’s preferred inflation gauge—the Personal Consumption Expenditures (PCE) Price Index—rose 3.6% year-over-year in September, well above the Fed’s long-term 2% goal.

Logan pointed out that current inflationary pressures are broad-based across various goods and services, not solely stemming from tariffs or energy price increases. After the Iran war pushed up energy prices, related cost pressures are also spilling over into other areas of the economy.

At the same time, U.S. economic growth remains strong. Data released Thursday showed that the U.S. economy grew in the third quarter at the fastest pace in a year, as both business investment and consumer spending kept economic activity robust.

Logan believes that the U.S. labor market as a whole is in balance, but may be tightening slightly.

She also noted that rising long-term interest rates primarily reflect investors’ expectations for improved economic prospects and a higher neutral rate. Therefore, higher market rates more so reflect investors’ beliefs that the Fed still has work to do, rather than acting as an independent drag on economic growth.