Fed's Logan: Tariffs Pose Inflation Risk, Economy Stable

Dallas Federal Reserve President Lorie Logan stated on Monday that the Federal Reserve is closely monitoring a series of data points to determine the necessary responses, given the stable labor market, inflation slightly above target, and uncertain outlook. Logan emphasized that the Fed can be patient and wait for data, knowing that it can act swiftly if any significant risks materialize. She highlighted the Fed's role in ensuring that one-time price increases do not evolve into persistent inflation issues.

Logan's remarks align with many of her colleagues who are responsible for setting interest rates. They anticipate that President Trump's tariffs will simultaneously raise unemployment and inflation, potentially placing the Fed in a dilemma where it must prioritize one challenge over the other. The next Federal Reserve meeting is scheduled in approximately two weeks, with widespread expectations that they will maintain the short-term borrowing cost within the current range of 4.25% to 4.50%, which has been in place since December. Financial markets predict that interest rates will not be lowered until September.

For Logan, inflation data is a top priority. The Fed's inflation target is a 2% year-over-year change in the Personal Consumption Expenditures (PCE) price index. Last week's data showed the PCE inflation rate at 2.1%. However, most analysts believe that the impact of Trump's aggressive tariffs has not yet been reflected in the data. Logan noted that a survey by the Dallas Fed indicates that half of the businesses expect to raise prices for consumers due to increased import tariffs. The survey also suggests that households and businesses anticipate short-term inflation increases.

Logan warned that the primary risk to the outlook is that tariffs or other potential shocks could lead to elevated inflation expectations, persisting even after the shocks impact the economy. She also mentioned that tariffs themselves, uncertainty in national economic policies, and resulting financial market volatility could slow down the economy. Logan stated that, so far, the labor market has remained balanced, and the economy has been stable.