Dallas Fed's Logan warns rate hikes may be needed as PCE stays at 3.8%

Logan's warning marks the most explicit call from a sitting FOMC voter that the next policy move could be a hike, not a cut.

Dallas Fed President Lorie Logan said the central bank may need to raise interest rates later this year, warning that inflation at 3.8% is taking too long to return to the 2% target.

"I'm increasingly concerned that higher interest rates could be necessary later this year to fully restore price stability," Logan, a current voting member of the Federal Open Market Committee, said Wednesday at the University of Texas at El Paso.

The personal consumption expenditures price index rose 3.8% in May from a year earlier, while the core measure excluding food and energy gained 3.3%. Logan said monetary policy looks "neutral, or perhaps even a bit loose" rather than restrictive, given solid economic activity and corporate earnings that have been "going gangbusters."

The warning from a sitting FOMC voter that rates may need to rise challenges the prevailing market narrative that the Fed's next move will be a cut. Prediction markets now price a 39.5% probability of a rate hike in 2026, up from 34% a day earlier, according to data cited by forecasting platforms.

Logan was one of three Fed officials who voted to support the FOMC's decision to hold interest rates steady in April but dissented from the inclusion of an easing bias in the statement, reflecting her preference for a more restrictive posture. She pointed to disruptions from the Iran war, particularly the bottleneck in the Strait of Hormuz and the time needed to recover oil production, as factors that could keep inflation elevated.

"I'm just not sure that policy is very restrictive. To me, it looks neutral, or perhaps even a bit loose," Logan said. To bring inflation back to 2%, she said the Fed will need to put at least mildly restrictive policy in place.

Logan noted that she, like newly sworn-in Fed Chairman Kevin Warsh, favors inflation gauges that strip out volatile categories. The Dallas Fed's trimmed mean PCE inflation rate, which excludes extreme price changes each month, rose just 2.3% in May. But Logan cautioned that this measure may be understating underlying price pressures, as a change in the mix of price increases and decreases is causing the trimmed mean to drop too many price increases.

Other inflation measures paint a less benign picture. The Cleveland Fed's median PCE inflation rate measured 2.8% year over year in April, while the New York Fed's multivariate core trend model registered 4% in April. Taken together, Logan said inflation appears to be trending in the mid-2% range — still above the Fed's 2% target.

The remarks echo those of Cleveland Fed President Beth Hammack, who said Tuesday that policymakers need to examine multiple inflation gauges rather than fixating on a single measure. "I don't think we have the luxury of picking just one and staying maniacally focused on it because it could be that you pick the wrong one and then you're making bad decisions," Hammack said.

The S&P 500 fell 51.9 points and the Nasdaq Composite dropped 236.19 points following Logan's comments, as traders repriced the likelihood of tighter monetary policy. The shift in rate expectations also pushed bond yields higher, though the moves were contained as markets await further guidance from Fed Chair Jerome Powell and New York Fed President John Williams in coming days.

The last time a sitting FOMC voter explicitly raised the prospect of a rate hike during a tightening cycle was in 2023, when several officials warned that additional increases might be needed after the Fed had paused — a scenario that ultimately did not materialize as inflation moderated. This time, the combination of war-driven supply disruptions and sticky services inflation presents a more complex challenge for policymakers.

The next FOMC meeting is scheduled for July 28-29, where the committee will update its economic projections and rate path. If inflation data continue to run hot, Logan's warning could gain support among other FOMC members who have so far been reluctant to discuss rate increases.

This article is for informational purposes only and does not constitute investment advice.