AUSTIN, TEXAS – – The Federal Reserve is navigating a complex economic landscape, balancing the need to sustain a robust labor market with the persistent challenge of bringing inflation back to its 2% target. That was the core message delivered by Dallas Fed President Lorie Logan today at the FIA-SIFMA Asset Management Derivatives Forum in Austin, Texas.
Logan indicated her support for the FOMC’s decision to hold the fed funds target range steady in January, following three rate cuts in 2025. These earlier cuts, she explained, were intended as “additional insurance against a more rapid cooling in the labor market,” but acknowledged they also carried increased risk on the inflation front.
Recent economic data suggests those risks are moderating. While job gains slowed in the first half of 2025, they have since stabilized around a level consistent with a full-employment labor market. The unemployment rate, which rose gradually through September, ticked down to 4.4% in December. Economic activity has also rebounded strongly, with third-quarter real GDP growth estimated at 4.4% and strong growth projected for the fourth quarter, even accounting for the temporary disruptions caused by the government shutdown last fall.
However, inflation remains a key concern. Headline PCE price inflation stood at 2.8% in November, slightly higher than a year earlier and has remained above the Fed’s 2% target for nearly five years. While Logan anticipates progress on inflation this year, driven by fading upward pressure from tariffs, decelerating housing services inflation, and a more balanced labor market, she stressed she is “not yet fully confident inflation is heading all the way back to 2 percent.”
Specifically, Logan highlighted several potential headwinds. Tariffs may take longer to fully work their way through prices than anticipated, and core non-housing services inflation has remained stubbornly stable. She also cautioned that annual price increases in January and February could surprise to the upside, as has been the case in recent years.
Logan pointed to upside risks to economic activity, including fiscal policy and buoyant financial conditions. Indexes tracking the economic impact of asset prices indicate that equity valuations are providing a significant boost to growth. She also noted that deregulation and new technologies, such as artificial intelligence, could increase demand and potentially exert upward pressure on prices in the near term.
A key challenge, Logan noted, is determining how restrictive current monetary policy actually is. Estimates of the neutral interest rate – the rate that neither stimulates nor restrains economic growth – vary considerably, ranging from 1.08% to 2.09%. The current real fed funds rate, at 3.64% minus the 2% inflation target, falls squarely within this range, suggesting policy may be less restrictive than previously thought. Market-based estimates of the neutral rate align with the upper end of these model-based estimates.
“I start the new year cautiously optimistic that our current policy stance will allow the FOMC to bring inflation all the way back to our 2 percent target while sustaining a balanced labor market,” Logan stated. However, she emphasized the need for humility and a willingness to adjust course as economic conditions evolve.
Policy Implementation and Reserve Management
Beyond monetary policy, Logan addressed recent changes in the implementation of the Fed’s policies. In December, the FOMC ended the decline in its balance sheet and initiated reserve management purchases (RMPs). These decisions, she explained, were natural steps toward fully implementing the “ample reserves regime” adopted in 2019.
The goal is to maintain an ample level of reserves to accommodate trend growth in the demand for Fed liabilities and seasonal fluctuations. Logan emphasized the importance of ensuring that banks face neither an opportunity cost nor a subsidy for holding reserves. She views an environment where money market rates are close to the interest rate on reserve balances (IORB) as indicative of ample reserves.
Recent market conditions, with money market rates running below IORB, prompted the resumption of balance sheet growth. Logan clarified that these reserve management purchases are technical adjustments and not indicative of a change in the stance of monetary policy. She intends to monitor the spread between money market rates and IORB, particularly the tri-party general collateral rate (TGCR), as a key indicator of reserve supply needs.
Logan also announced support for enhancements to the Fed’s standing repo operations (SRP), including the elimination of the aggregate cap on SRP usage. This move aims to ensure that funding costs do not spike unexpectedly and to limit the potential for funding stress, particularly during times of market volatility. She further advocated for providing a centrally cleared option for SRPs, which would encourage greater participation and enhance the facility’s effectiveness, aligning with the broader industry trend toward central clearing in the Treasury market.
“We should take another step to improve the SRP’s effectiveness,” Logan said. “Providing a centrally cleared option would make leverage-constrained counterparties more likely to redistribute liquidity by tapping the SRP, especially in times of market stress.”
The transition to central clearing in the Treasury market is at a critical juncture, and Logan urged continued industry focus on completing this important market structure change. She concluded by reaffirming her commitment to sustainably achieving the FOMC’s dual mandate goals of price stability and maximum employment.
