A new monetary policy metaphor from Dallas Fed president Lorie Logan helps explain where things stand for the central bank — and the outlook for U.S. interest rates — heading into the end of the year.
Why it matters: The inflation fire has been mostly doused. The question now is how much more water — if any — the Fed needs to pour on the remaining embers to ensure no additional flare-up.
What they’re saying: Logan invoked her youth going on Girl Scout camping trips. “As every Scout knows,” she said at Southern Methodist University, “when you put out your campfire, you must make sure it is ‘cold out’ — so completely extinguished that you feel no heat when you touch the ashes with your bare hands. Any warm embers could reignite later.”
State of play: In projections offered in June, 12 of 18 policymakers expected it to be appropriate to raise rates two or more times before the end of 2023. The central bank did one hike at the end of July, meaning it would take only one more rate hike for policy to align with that forecast.
Yes, but: There remain simmering inflation risks that could make some policymakers reluctant to put away their buckets.
The bottom line: “You might say we need to drizzle water on the fire pit and watch closely for signs that the coals are heating up again,” said Logan.