Speech by President Lorie Logan
Lorie Logan
Dallas Fed President Lorie Logan delivered these remarks at “The SNB and its Watchers 2025” Conference at the Karl Brunner Institute.
Good afternoon.
Thank you to the Karl Brunner Institute for inviting me to participate in this important conference. As always, the views I’ll share are mine and not necessarily those of my colleagues on the Federal Open Market Committee (FOMC).
It is an honor to join this distinguished panel addressing a topic that is both timely and timeless: the role of economic uncertainty in monetary policy.
The topic is timely because this is a moment of substantial uncertainty about the economic outlook. And it is timeless because, really, there’s nothing especially new about that situation. Uncertainty is a pervasive feature of the macroeconomy and monetary policymaking.
Theoretical models in which one knows the precise current state of the economy, fully understands the economic mechanisms and has perfect foresight about the future can sometimes provide useful baseline approximations. But these are merely approximations. The world is complex, multifaceted and ever-changing. A policymaker cannot know with certitude the current state of every relevant aspect of the economy, let alone exactly how every part of the economy works or what shocks may arrive.
Yet policymakers must still make policy decisions. Even a choice not to act is itself a decision. And we cannot let uncertainty paralyze us. Rather, it’s incumbent on policymakers to tackle uncertainty head-on.
First off, policymakers can reduce uncertainty about the state of the economy by gathering economic information from a wide range of sources. For me, those sources include official statistics, private-sector data, financial market conditions, surveys of households and businesses, and reports from business and community leaders and market contacts about what they are seeing in the economy and financial system. Besides sharpening the economic picture, taking on information from a wide range of sources makes the policy process more robust to disruptions in the flow of information from any one source, such as the government shutdown in the United States that recently paused publication of many federal official statistics . But even after thorough information-gathering, some uncertainty will always remain.
Another important area of uncertainty is about how the economy works, and especially the mechanisms through which monetary policy influences the economy. Again, policymakers can work to reduce the uncertainty—for example, by consulting a wide range of models and experts to see where there’s consensus and by investing in research to deepen understanding over time. But as with uncertainty about the state of the economy, uncertainty about the mechanisms can only be reduced, not eliminated.
And we can never know what the future may bring. The shifting winds of geopolitics and technology only add to the range of potential shocks right now.
In the end, therefore, policy decisions must take uncertainty into account. That can mean adjusting a policy decision to reflect risk management considerations instead of doing what would be optimal if the situation were certain. Research shows that how to make these adjustments depends crucially on the source of uncertainty. For example, if policymakers want to provide economic stimulus but are uncertain how much stimulus will come from a specified reduction in interest rates, it can be optimal to move in small steps and learn more about the size of the effect. On the other hand, if policymakers are uncertain about the persistence of shocks to inflation, it can be optimal to move more aggressively than one would under certainty so as to mitigate the danger of unanchored expectations. There are also many cases when policymakers should look through uncertainty, either because there is no benefit to adjusting in one direction or another, or because the key aspects of the economic outlook are certain enough to provide clear counsel even as some uncertainties remain.
In that spirit, I’ll describe the aspects of the U.S. economic outlook and monetary policy strategy that seem relatively certain to me at this time, as well as some key uncertainties I’m continuing to work to resolve. I’ll then briefly discuss the outlook for the Federal Reserve’s balance sheet.
The economic and monetary policy outlook
The FOMC has made two 25-basis-point rate cuts in recent months. While I supported the September rate cut, I would have preferred to hold rates steady at our October meeting.
Congress gave the FOMC a dual mandate: to pursue maximum employment and stable prices. The labor market has remained roughly balanced and cooling slowly. Inflation remains too high, taxing the budgets of businesses and families, and appears likely to exceed the FOMC’s 2 percent target for too much longer. This economic outlook didn’t call for cutting rates.
Payroll job gains fell markedly in 2025. But slow job gains don’t necessarily mean there’s more slack in the labor market. Labor supply has fallen at the same time as demand, particularly due to changes in immigration policy and labor force participation. In consequence, we haven’t seen a rapidly widening gap between the number of jobs available and the number of people who want work. The unemployment rate rose slowly during the year. Unemployment claims have stayed low, although I’m mindful of recent layoff announcements by some employers. And, thanks in part to financial conditions, resilient consumer and business spending continues to support employment.
The risks to the labor market do lie mainly to the downside. In this low-hiring environment, the job market could have difficulty absorbing any significant pickup in layoffs from the current low level. Asset valuations can sometimes snap back without much warning, which might take the wind out of consumer spending. However, the resolution of the federal government shutdown takes one near-term downside risk off the table.
Turning to the price stability side of the mandate, inflation in the United States is still too high and too slow to return to target. The FOMC targets a 2 percent inflation rate as measured by the annual change in the price index for personal consumption expenditures, or PCE. Inflation by that measure exceeded the target in each of the past four years. It’s on track to do so again this year. The index rose 1.8 percent just in the first eight months of the year, and forecasters expect it to end the year up about 2.9 percent.
While inflation has come down significantly from the post-pandemic peak, it’s still not convincingly headed all the way back to 2 percent. I remain concerned about the trajectory of underlying inflation, even after accounting for temporary factors that affect prices in the near term. The Blue Chip Economic Indicators surveys dozens of private-sector forecasters about their economic outlooks. The Blue Chip consensus outlook is for 2.6 percent PCE inflation in 2026 and around 2.4 percent in 2027, followed by fluctuations between 2.1 and 2.2 percent all the way out to at least 2031—never all the way back to target.
The FOMC has repeatedly reaffirmed its commitment to the 2 percent inflation target. Our obligation to the public is to deliver on this commitment, as well as our equally serious obligation to pursue maximum employment.
The FOMC’s long-run strategy calls for a balanced approach to our two objectives. I carefully weigh the potential labor market costs of measures to reduce inflation. But labor demand and supply have remained in rough balance. When the FOMC met in October, it had already mitigated downside risks by cutting rates at its previous meeting in September. The remaining risks to employment are ones the FOMC can monitor closely and respond to if they are becoming more likely to materialize, not ones that currently warrant further preemptive action. For those reasons, I did not see a need to cut rates at the October meeting. And with two rate cuts now in place, I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly.
Uncertainties in the near and longer terms
One key uncertainty is how much more room there may be to reduce rates while still maintaining a restrictive policy stance that can further slow inflation. The gradual cooling in the labor market during 2025, among other evidence, demonstrates that policy was at least modestly restrictive before the September and October rate cuts. At the same time, economic and financial developments raise substantial doubts about whether we entered 2025 with more than 75 basis points of restriction. For example, if policy had been significantly restrictive, I would have expected to see a more rapid increase in labor market slack. And I wouldn’t have expected to see soaring asset valuations in many markets, nor corporate credit spreads compressed to historic lows. That’s not to say labor market and financial conditions are uniformly easy. Some workers are experiencing greater difficulty finding work, and financing is tighter in some sectors, such as housing. But those pockets of pressure are more consistent with modest restriction than significant or severe restriction.
Policy restriction is a function of real interest rates, not nominal ones. Forecasters expect about 2.7 percent inflation over the coming year. That puts the current real fed funds rate around 1.2 percent, which is toward the low end of typical model-based estimates of neutral, although all of these estimates are highly uncertain. Put another way, with inflation running persistently above target, a fed funds rate close to 4 percent isn’t nearly as restrictive as you might have thought.
Policy also has to account for headwinds and tailwinds hitting the economy. Elevated asset valuations and compressed credit spreads aren’t just indications that policy most likely isn’t very restrictive. They’re also indications that the fed funds rate needs to offset tailwinds from financial conditions.
Putting it together, even in September I was not certain we had room to cut rates more than once or twice and still maintain a restrictive stance. And having made two cuts, I’m not certain we have room for more. Monetary policy works with a lag. It’s too soon to directly assess the degree of restriction from the current stance of policy, with two rate cuts already on board. In the absence of clear evidence that justifies further easing, holding rates steady for a time would allow the FOMC to better assess the degree of restriction from current policy. Taking the time to learn more can help us avoid unnecessary reversals that might generate unwanted financial and economic volatility.
Looking further in the future, ongoing structural changes could meaningfully shift the economy’s long-run trajectory. The artificial intelligence (AI) investment boom and elevated valuations for companies involved in AI reflect investors’ hopes that generative AI will transform human work, productivity and economic growth. Should those hopes come to fruition, the implications for inflation and labor markets will be profound—especially for younger workers, who by some accounts are already being affected in some occupations. Federal, state and local agencies around the United States are also seeking to support economic growth by removing or changing regulations. If successful, these efforts could raise productivity and permit more employment growth with less inflation. Meanwhile, to the extent that higher tariff rates change trade flows, patterns of investment and work in the United States could need to adjust.
Over time, any or all of these factors could substantially influence where the FOMC will need to set the policy rate to achieve its dual mandate goals. My team and I are closely analyzing developments in these areas. It’s crucial to identify and react in a timely way to major changes in the economy. For now, though, the potential long-run structural shifts aren’t key ingredients in my near-term monetary policy views. While the AI investment boom is supporting spending and financial conditions, for example, the direct effects on employment and productivity have so far been relatively contained. The nature of the potential labor market transformation from generative AI remains unclear: what kinds of human work will it ultimately replace, and what kinds will it complement? And big bets on new technology don’t always pan out. The sources of financing for these investments bear careful monitoring.
While AI investors may be taking big risks in search of outsized returns, central bankers are famously conservative. I’ll be looking for more concrete evidence on the size, direction and timing of potential long-term structural changes as I consider how to I take them on board in my outlook.
Balance sheet normalization
Let me conclude with a few words on the Fed’s balance sheet. The FOMC decided in October to stop reducing the Fed’s asset holdings as of Dec. 1, ending a phase of balance sheet normalization that began in mid-2022.
Asset runoff reduced not only the asset side of the Fed’s balance sheet but also the bank reserves on the liability side of the balance sheet. This symmetry is important because the Fed implements monetary policy in a regime of ample reserves, which meets banks’ demand for reserves with market rates close to interest on reserves. As I’ve argued elsewhere, ample reserves are efficient. Reserves are the safest and most liquid asset in the financial system and one that does not cost the Fed to create. The Friedman rule therefore says it’s efficient to eliminate banks’ opportunity cost of holding reserves, and that’s what the ample-reserves regime achieves.
In recent months, money market rates moved up toward and sometimes above the interest rate on reserve balances (IORB). After averaging 8 to 9 basis points below IORB in the first eight months of 2025, the tri-party general collateral rate (TGCR) averaged slightly above interest on reserves in the subsequent period. TGCR is a rate on overnight repos collateralized by Treasury securities. It’s a safe rate in a liquid and competitive market, and I view it as the cleanest single measure of money market conditions. The rise in TGCR made it appropriate to end asset runoff, as the FOMC decided to do.
Importantly, ending asset runoff only slows but does not stop the decline in reserves. If the Fed’s assets are held fixed, trend growth in non-reserve liabilities such as currency will absorb more of the balance sheet over time. The demand for reserves will likely also change over time in response to economic growth, changes in the banking and payments businesses, and adjustments in regulation. To maintain ample reserve conditions over time, the FOMC will need to determine when to start adding to its assets.
In an efficient system, market rates should be close to, but perhaps slightly below, interest on reserves on average over time. “On average” is key there. Market rates can fluctuate from day to day. Bringing the average level close to IORB also requires some tolerance for modest, temporary moves above IORB.
Repo rate spreads to IORB have receded only somewhat in recent weeks from the peaks reached in late October and early November. Looking at where TGCR and other rates are settling, I expect it will not be long before it is appropriate to resume balance sheet growth so that money market rates can average close to, but perhaps slightly below, IORB. Those reserve management purchases will be technical steps. By no means will they represent a change in the stance of policy.
However, the size and timing of reserve management purchases should not be mechanical, in my view. While purchases will need to offset relatively predictable trend growth in currency, reserve demand will likely also change over time in response to economic growth, changes in the banking and payments businesses, and adjustments in regulations. Reserve supply will need to roughly track those developments to remain efficient.
Thank you.
Lorie Logan is president and CEO of the Federal Reserve Bank of Dallas.
The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve System.