A conversation with Dallas Fed President Lorie Logan

Well, good afternoon. Thank you all. It's great to see you. And Darren, I just want to thank you for that amazing introduction. Thank you for that. And more importantly, I just want to thank you for your leadership here at the Houston branch. For those of you who know Darren, I think every single person in this room does. You know what a superb leader he is for the communities here in Houston. And I just want to take a moment to recognize and thank you, Darren, for all you do. And I just want to officially welcome all of you to the Dallas Fed's Houston branch. And I particularly wanted to welcome many of our current and former directors on either the Dallas board or our branch boards as well as some of our advisory councils and want to thank you for your tremendous service to the Federal Reserve system. And if I could ask those of you who are serving today or have served formally to stand so we can express our appreciation, I'd welcome you doing so. And I'm really looking forward to my conversation today with Dr. Ford Fischer in just a few minutes. We had the great pleasure of spending time together yesterday at GE Vernova's Houston Learning Center really focused on issues of workforce development for businesses and leaders here in the Houston area and I hope we'll be able to talk about some of those insights we gained from that learning center in our discussion later. So welcome and thank you. As I travel through the Dallas Fed's district, I have the opportunity to talk extensively with workers, bankers, business executives, and community leaders, just as we're doing here this afternoon. And those dialogues are really important to me, and they matter for two reasons. First, they provide nuanced, up-to-date information, and I'm grateful to everyone who takes time to talk. Your perspectives help me learn how people are experiencing the economy. You teach me how national policy decisions reverberate here in Texas, and you show me what trends are on the horizon. Aggregate macroeconomic statistics can be highly informative, but there's certainly no substitute for the ground on the ground insight that each of you provide. Now, second, public dialogue lets you hold me accountable for serving you well. The Fed is an independent central bank, and independence means monetary policy decisions focus on the long term. We're still accountable to the American people. The Fed reports regularly to Congress, as Chairman Warsh did earlier this week. Community leaders on the board of directors at each Federal Reserve Bank select and evaluate its management. And in conversations like this one today, you get to tell us how we're doing. And I look forward to that. Through all those engagements, we expect and need the public to hold us to account for fulfilling the important mission that you've trusted us with.

The Federal Open Market Committee sets monetary policy to achieve two goals, maximum employment and stable prices. Congress assigned us those goals and we pursue both with vigor and focus. Everyone who wants to find work should be able to do so. Households and businesses should be able to count on low inflation so they can make ends meet today and plan for a prosperous future. In the long run, the FOMC's two goals are complimentary. They work in concert to support a strong and growing American economy. So today, I'd like to tell you why I currently believe modestly higher interest rates would better balance the outlook and risks for the FOMC's dual mandate goals. The FOMC targets a 2% inflation rate as measured by the price index for personal consumption expenditures or PCE. Inflation has exceeded that target for more than five years. Over the 12 months through May, the most recent data available, the PCE inflation rate was 4.1%. Every month of above target inflation has compounded the strain on Americans' budgets. Another month of expensive grocery bills for parents feeding their families. Another month of rising input costs for companies. Another month of unexpected expenses for nonprofit organizations and local governments serving our communities. Now, another metric, the consumer price index, CPI, showed this week that the one-month inflation rate eased in June. But one month of relief is not enough. It's time to finish the job of restoring price stability. Now, the fact that inflation has been high for a long time or that it dipped last month doesn't determine what monetary policy needs to do now. Policy takes time to work its way through the economy. What matters is where inflation is headed from here. In monetary policy, as in hockey, you have to skate where the puck is going. Unfortunately, inflation does not appear to be headed sustainably back all the way to 2%. To see this, it's necessary to take a longer term view and look through short-run movements in particular prices. Developments such as tariffs and conflict in the Middle East have raised inflation over the last 15 months. As those shocks fade, inflation will come down somewhat. Indeed, the reopening of the Strait of Hormuz temporarily caused some energy prices to drop rapidly, which contributed to the decrease in the June CPI reading. The situation in the Persian Gulf is fluid and the near-term outlook for energy prices is uncertain, but energy prices will eventually stabilize at some level. At that point, what will matter is the broader trend in prices.

There's no single perfect way to measure where inflation is headed. So, I combine many methods, each with its strengths and weaknesses, to build up that broader picture. Now, one group of methods relies on statistical models. Metrics that filter out volatile categories or unusual price swings can give a better read on where overall inflation is likely to go. The Dallas Fed trim mean PCE inflation rate, for example, sets aside the most extreme price changes each month. It stands at 2.4% for the 12 months through May. It should tick down slightly when the June data are incorporated at the end of this month. But my staff's research finds though that a change in the mix of price increases and decreases is causing the trim mean to drop too many increases right now. This effect likely makes the trim mean lower than the true inflation trend. Indeed, other measures are higher than the trim mean. Core PCE inflation sets aside volatile food and energy prices. It's 3.4% and has risen 4/10 of a percent since December. The New York Fed's multivariate core trend model also estimates the persistent component of inflation at 3.4% right now. It's hovered around 3% for three years. Dallas Fed researchers have estimated how much tariffs, energy prices, and mismeasurement of inflation for computer software and accessories are contributing to these measures. Those adjustments bring the numbers down a bit, but not all the way back to 2%. Now, another approach looks at specific inflation categories where temporary distortions are relatively small. Currently, one such category is inflation for market-based non-housing core services. Tariffs on manufactured goods don't directly affect it, and neither do energy and food prices, the normalization of rents after the pandemic, or the stock market fluctuations that change portfolio management fees. But the message here is much the same as with those statistical models. Market-based non-housing core services inflation slowed to near 3% in mid 2024. On a 12-month basis, it has made no progress since. In fact, it picked up a bit this spring, even after adjusting for the pass-through of higher fuel prices into services such as airfares.

So, labor is the main input for services businesses. So, services inflation and wage growth historically track each other closely. The signal that wages send for inflation also depends on workers' productivity. Wage growth has been subdued enough that adjusted for productivity, it's roughly consistent with 2% inflation. It's tempting to call this good news for the outlook. But because actual inflation has been well above 2%, it's not good news for workers. It means earnings aren't keeping pace with the cost of living and workers are getting a smaller share of the output they produce. Mathematically, there are three ways a gap between inflation and productivity-adjusted wage growth can play out. One, inflation can come down to match wages. Two, workers can persuade their bosses to give raises and wages will rise to match inflation. Or three, worker share of income can fall as it has for most of this century, and the gap between wages and inflation could hold steady. It'd be helpful for the Fed's inflation goal if price growth came down in line with wage growth, but that hasn't happened yet in a sustained way. And business contacts are starting to report the opposite. CEOs at a few Texas companies have told me recently they're raising workers' pay to help manage their higher cost of living. And the Dallas Fed's latest Texas business outlook surveys also show a pickup in actual as well as projected wage growth. Strong consumer spending, soaring corporate profits, accommodative financial conditions, and AI investment continue to drive economic activity. Equity prices are up 20% over the past year. Credit spreads are close to the tightest levels they've ever been. These financial conditions reflect investors' optimism about the American economy and they fuel consumption, especially by wealthier households. AI and other new technologies may eventually generate a surge in productivity and they may allow the economy to supply more goods and services. But the potential size and timing of those productivity gains are uncertain. The demand effects are already here and when demand outstrips supply, the result is higher prices. The June CPI data do suggest the possibility of a more hopeful scenario where inflation returns all the way to our target. Besides the sharp decline in energy prices, core goods prices fell as the effects of tariffs receded. Non-housing core services prices were surprisingly soft and housing costs moderated. If the trends in housing and non-housing services continue, overall inflation could fall further. Still, that path is tenuous. It relies on avoiding further price pressures from energy shocks in the near term and from strengthening demand in the medium-term. For now, it's more of a hope than a likelihood.

So, putting together all these ways of looking at the data and the economy, my best judgment is that inflation appears to be heading toward the mid-2s, not all the way back to 2%. The monetary policy response to that situation must also consider our other goal, maximum employment. On this dimension, from a monetary policy perspective, the economy is performing solidly. The unemployment rate averaged 4.3% in the first half of this year, and that's about the same as a year earlier. And it's near most estimates of the lowest sustainable level. Employers added an average of 92,000 jobs per month in the first half of this year, modestly outpacing growth in the size of the labor force. So overall, the labor market is well balanced and perhaps even strengthening a bit. To be sure, many workers face meaningful challenges. Amid the uncertainties of rapid technological change, companies are both slow to hire and slow to fire. That dynamic is keeping the labor market in balance, but it's cold comfort for anyone who needs to find a new job. New technologies and changing trade patterns are also increasing the demand for some skills and decreasing the demand for others. These are real difficulties, but not ones that easier monetary policy can fix. The labor, consumption, and financial data indicate that monetary policy is not restraining the economy, and that's a problem for sustainably achieving the FOMC's inflation goal. If inflation is not heading all the way to 2% on its own, then at least some policy restriction is needed to help it get there. Moreover, the FOMC has committed to taking a balanced approach to those two dual mandate goals. In my view, we should not perpetually achieve one goal while missing on the other. History shows that when central banks try to hold down unemployment by accepting persistent inflation, they often end up with more inflation and more unemployment. If higher inflation becomes entrenched, we'd need sharper rate increases to bring it back to target with a larger cost for the labor market. Better modest restriction now than severe restriction later.

Appropriate monetary policy also accounts for risks. The economy can always surprise in either direction, but downside risks to employment have faded after drawing focus late last year. And the inflation risks are mainly to the upside. Conflict in the Middle East reignited over the weekend and pushed up the price of oil. Even if commodity shipments resume soon, business contacts tell me consumer price pressures could last longer. Capacity constraints at refineries will lift fuel prices regardless of global oil supply. Industries like airlines that are seeing strong demand may not rush to take back recent price increases. And looking beyond geopolitics, the AI investment surge could trigger nonlinear price increases. That's already happening in a few narrow categories. As you know, if you've had occasion to buy computer chips recently, the risk is that the pressures broaden as AI demand touches construction, power generation, and other sectors. So to sum up, inflation has been too high for too long and does not appear to be on track all the way to our 2% target. And the inflation risks are to the upside. The labor market, meanwhile, is solid. And without any policy restraint, these conditions are likely to continue until there's an unanticipated shock. So, I currently believe modestly higher interest rates would better balance the outlook and risks for the FOMC's maximum employment and price stability goals. Of course, the economy is dynamic and more data arrives nearly every day. If the outlook changes, I'll update my policy views accordingly. So, that's how I'm seeing the economy right now. But, I just want to end on one last point. Neither I nor any other single person makes monetary policy on their own in the United States. The Federal Open Market Committee is a committee. All seven governors of the Federal Reserve Board and all 12 presidents of the Federal Reserve banks participate in that policy discussion and 12 of those 19 people have a vote at any given time. When I go to the next FOMC meeting in a week and a half, I'll bring my best evidence, analysis, and arguments about what we should do. I'll also listen carefully to my colleagues' evidence, analysis, and arguments. I may persuade them, they may persuade me, we may agree to disagree, or more likely, we'll all adjust our thinking as we take in new perspectives. By putting together information and ideas from across the country, we gain a deeper insight into the economy and make better decisions to serve the American people. So with that, let me say again how happy I am to see all of you here with us in the Houston branch and I look forward to my discussion with Dr. Fischer and more importantly, I look forward to hearing from all of you. Thank you and welcome.

Well, thank you again for this opportunity and the conversation and thank you all for being here. I think it's appropriate to start with energy just given how big of a focus it is on the economic outlook right now. I think this audience knows very well that the US is the largest producer of oil and gas and Texas makes up the biggest proportion of that. And so what we try to do at the Dallas Fed is make sure that we are serving as a center of excellence of not only research in that area but also making sure that we can bring the voice of the industry to those conversations. And so that's what we were doing yesterday. Absolutely. Here. We have an energy advisory council made up of the leading minds of the energy industry and they were here with us yesterday afternoon and evening talking about these developments in the Middle East and what that means for business activity here in the US. And one of the questions was exactly this. You know, we know that we're seeing the biggest supply shock of energy coming from the shutdown of the Strait of Hormuz in history. And a key question is is there going to be production increase coming out of the US that would fill some of that gap. From the very early days of this stress we heard from the industry that you know there might be some modest increases in production coming out of the Permian but it would probably be modest. And the reason for that is that largely the big reason is there's just much more capital discipline by the producers in the energy sector. And so with volatility of prices, unless they know they're higher and sustained, they're not going to make the type of investments that are needed to increase that production. But what we also have learned and was reported in our most recent April energy survey that we do of energy executives in the district is even if prices were higher and sustained over a longer period of time, there are other constraints that may keep them from expanding that capacity. And if you go back to that information from the April survey, you'll see that two of those constraints, one of those was gas takeaway. So, when we're producing oil, we're also producing gas and that gas has to go somewhere and just the storage or pipeline capacity isn't there to make that economical. Now, we're starting to see some pipelines come online. So, that is being alleviated to some degree. And the second is policy and regulatory constraints that were seen as a prohibition in that. What we found out yesterday and I thought was interesting in discussion, we spent a

Lot of time talking about water.

And so, I think that's not the near-term issue, but I think over the medium run, it's an issue to spend more time on. So we've seen an increase in export activity of oil and gas. A lot of that's been coming from inventories, not from a significant amount of new production. Our survey suggests a couple hundred thousand new barrels per day in this year or next year, but not filling the 10 million barrels per day gap that we're seeing from the closure of the street openness.

Well, I am looking out in the audience right now and seeing a number of experts in this exact space. You know, as I talk with business leaders, which we did yesterday in an early morning roundtable on this exact issue, talk with hyperscalers, with power companies, with energy companies, with those that are leading data center projects. The demand is significant for additional power. That comes after years of demand being very flat to steady, and now we're just seeing a tremendous increase. I think the challenge is getting the estimates right, in part because there's so much frenzy to get these data centers built and to get access to compute power that many of these projects are applying for connections in many different areas. So there's just duplicative applications, and you have to sort through that to get better estimates for what that demand is likely to be. And there could be other supply constraints that prevent these data centers from actually getting up and running. We were talking a lot yesterday about how long it takes to get a gas turbine and other things that could slow down that activity. So getting the estimates is really challenging, but even taking the most conservative, you're talking about significant growth. So I do see electricity prices, which vary in regions all across the country, but on aggregate to be another source of modest inflationary pressures over the next couple of years. You know, the tour yesterday was really quite illuminating, to look at all of the equipment and the students who are training to become field engineers. You look at the equipment, thousands of pounds, and the way that that is transported to the centers is just really incredible to see. So it was really quite an eye-opening and impressive experience. So we are focusing also on the energy sector, having conversations with business and industry. So what are you hearing about the prospects for adding nuclear engineering and generating capacity as a part of the solution for the rising electricity demand? This is the question about nuclear that comes up in many of the conversations I have. I'm sure it comes up in many of yours. From what I continue to hear from business leaders, and again some of you are involved in those projects, is that it is an important source over the medium run for energy supply, but it is more of a medium-run issue than a near-term issue. Most of that is because of cost. Building a new nuclear site is a long time for full investment and also very expensive. It seems what's more practical in the shorter medium run is adding capacity to existing nuclear operations, and I think we've seen a few announcements on projects like that. I think the really interesting one is the small nuclear capabilities. I had the opportunity to go visit Texas A&M. Do we have any Texas A&M graduates with us today? I thought there'd be a lot of good cheers out there. They have a center specifically focused on this and beginning to train the workforce for the future, anticipating how these could become commercial over time. But it's a longer-term commitment for commercial use, as I see it. But I'm glad to see that working with universities, we're preparing so that students can develop the skills so that when it's there, we have a workforce that can support it. They showed me how they would manage a reactor in an earthquake, and it's quite important that that training is well done. I came quite confident that the students are getting a great education and focus there.

I should have said that. I did not emphasize that. But absolutely.

Okay, that's a big broad question.

I mean, do any of you go to a meeting or your family dinner table and not talk about AI? Even at our family dinner table, it's a conversation. I learn more from my kids than anyone right now. AI is a critically important theme for the macroeconomy, and I talked about that in my remarks. I'm very optimistic on the potential for productivity gains over time, and I hear that from business leaders. I think the question is the size and timing. Even over the past couple days, I've heard from specific industries where they're still in the early stages of figuring out how to find efficiency gains and productivity gains. But the big innovations are still some ways away. Innovation usually does take that time before it spreads to be something that's more general purpose where we can get those larger productivity gains. So I'm very optimistic about it. I think the question is the size and timing, but right now what we're seeing is the investment demand, and that is big and real, and it is in the cases of leaders I'm talking to outstripping supply, which has inflationary effects in the near term. We may get those productivity gains over time where we could grow even faster without those type of inflationary pressures, but it's not where I'm seeing in the near term. Okay.

Well, when we think about Texas and the work that we're doing, I'm really proud of the work of the Dallas Fed in focusing on our regional economic analysis. We have some of those experts in the room who I hope will introduce themselves as we go through today's program. Last year we saw slower job growth in Texas. We've been used to outperforming the nation in terms of job growth, and last year we did not perform at that level because there were a number of headwinds: immigration, energy prices were low, tariffs were affecting businesses, and we just weren't getting the in-migration that really supports overall job growth for our economy. So it was a slower year for us. We're seeing that rebound this year, which is good news. Oil prices are higher, the demand for data center builds is high in the region, and trading and businesses have gotten more comfortable with tariff and trade policies. So we are seeing that, and I think our team's forecast for job growth is about on the order of 1.8% for 2026 right now. So an improvement relative to last year, given the tailwinds that we're starting to see now.

I spend a lot of time on the road in communities talking with business and community leaders, and I'm always taking away real-time information that helps me evaluate the hard data that we're getting. Over the last couple days, we've had a number of meetings on AI buildout, data centers, energy, workforce development. I think some things I really took away support the overall assessment I have of the Texas economy. Wonderful. We're seeing a lot of manufacturing growth. We're seeing demand around the growing energy business because of the higher prices and demand for power and fuel to power those data centers. So activity here in Texas is looking brighter, and I heard that consistently throughout those meetings. I think there's still concerns on the labor side, given the immigration and demographics. There's concerns about the workforce and workforce availability to support these manufacturing activities that are coming here and the growing businesses that we have. So I think that's why it was so valuable to spend time on workforce development yesterday at the GE Vernova site, which is how do we connect educators and private industry so they can work in real time to develop the skills of those young people that can support that growth. As you said to me yesterday, four-year college isn't the right path for all of our students. Some of it is for two-year programs, and some of it is certificate programs. We want to make sure that they are matched and have awareness of these strong opportunities to really support and be a part of the economic growth in the area. I'm really proud to see the industry and educators coming together, like we're seeing today, figure out how to do that in real time and do it well, and support our young people and our communities.

I appreciate the focus and the question, and one I get in just about every audience I meet with. If we look throughout history and across countries, we know that monetary policy independence is critical for long-term economic prosperity. I'm really pleased with the focus of my colleagues on talking about the importance of monetary policy independence and talking with our community leaders about why that is so important, and that we keep that at the forefront of conversations. For many people, you might not be aware of the history. We are the third formation of our nation's central bank, and the first two of those central banks failed fairly quickly in terms of our economic history. There were two unique aspects of the third attempt in 1913 in the formation of the Fed. One was the regional aspect, the federated nature of the Federal Reserve system. We have 12 reserve banks that are deeply representing all regions of our country. The second is the long terms of the policymakers serving it. We have seven governors at the board of governors with 14-year terms, and we have 12 presidents with five-year terms. That means we can think about the economic decisions with a long-term perspective and not be buffeted around by short-term political developments. So that historical experience is really important to our founding, and there are two principles that I think are absolutely critical that we stay focused on.

We had our first meeting of the FOMC with our new chair at our last meeting, which was an incredibly smooth transition. I've had the opportunity to work with both our former Chair Powell for many years, and I had the opportunity to work with our new Chair Chairman Walsh when he was at the Federal Reserve system the first time and during the global financial crisis. So I know both of them have tremendous dedication to the institution and serving the American people. That was a very smooth transition. I've been going to FOMC meetings for many years as a staff lead at the New York Fed and now here in Dallas as president. The meetings, the structure, the data-driven focus, the nature and way we look at things has not changed a bit, and I don't anticipate that it will. It's very much a group discussion based on the data and research coming out. The chairman did announce five new task forces. I'm sure many of you have seen the news about that. The goal is to ensure that we're getting external advice and perspectives on the critical work we do on behalf of the American people. I think having that external perspective is valuable to bring into that overall policy discussion, and I'm really looking forward to hearing the results of their work and the recommendations, which we're expecting toward the end of this year.

Okay.

I have to be able to remember all five of these.

Thank you for all the great questions. I'll start, first on wages. As I said in my remarks, when we look at wages right now and think about where productivity is, it looks like wages are not going to provide those inflationary pressures at the moment. But there's the question of whether wages are going to rise toward inflation or the other way around. What I'm hearing from Texas business leaders is starting to hear some more concern about wage pressures, with a few businesses going ahead and increasing relative to what they expected at the beginning of the year, wages to account for higher energy and other living costs that are growing. In our most recent business outlook surveys, we saw more survey responses and concerns about upcoming wage pressures. So I'm worried about the type of risk that you're describing, but right now I would say it's early days in the data that we're seeing. On tariffs, I think it's a really important question. Many businesses, given the uncertainty, had sort of stopped planned projects and capital investment. Over the recent years, we've heard so much onshoring activity, particularly on both sides of the border, with property prices and other activity really growing, just getting ready for the need for onshoring or nearshoring activity. A lot of that seemed to pause during the tariff phases because there was uncertainty about where things were going. Where is the best investment, on which side of the border should they make that investment? But we're starting to see that pick back up again. So I think it's a fair point, and I think that's been part of the story that's been a better tailwind for growth in the region more recently. On the balance sheet, it's really where the task force is going to focus on this question. I think it's important to start with the question: what does an effective and efficient balance sheet size look like? Our goal should be efficient and effective, not just to bring down the size as an independent goal. I think the question is, if we were going to have a more efficient and effective system, would that lead to room to bring down the size of the balance sheet? I had the opportunity to speak about this at a conference in Dallas and produced a paper that looked at a whole variety of ways we could think about whether we're at the most efficient or effective point for the size of the balance sheet. I think the key issue for me is that we need to ensure that our system is going to provide the reserves to the banking system to ensure that we have an effective money market regime. To me, I evaluate that by seeing money market rates trading right around the interest on reserve balances that we pay banks. So that's the metric I'm looking for to determine whether we're at an efficient and effective point in the overall size of reserves in the system. There are two places where you can adjust the balance sheet. One is the amount of reserves that you're supplying to banks, and the other is the non-reserve liabilities on our balance sheet. For example, we provide a checking account to the US Treasury, and we provide other liability services on our balance sheet. I think a real important question is to go through each of those and decide whether we're doing that in the most optimal way. I think there are some places that we can look at to see if we can do this all in a more efficient and effective way. One area that is a possibility is our regulatory liquidity regime for banks, and whether that's optimized. At the moment, it's possible there could be adjustments, and if so, banks would demand fewer reserves, and that would lead to a smaller balance sheet but still providing an efficient, effective monetary policy implementation regime. So I'm looking forward to the results from the task force. I encourage you to take a look at the paper that I did with a colleague at the Dallas Fed of all the different ways I think we could take a look and do a really in-depth evaluation of these issues. I've been involved in monetary policy implementation since I started at the Fed in 1999, and you're always working on your monetary policy implementation regime because money markets are evolving, banking systems are evolving, our financial system is evolving. So there's always adjustments that you need to be doing, and we've been doing that throughout the history of the time I've been working on it. I think I have gone way beyond my time, but I will stay here and I'm happy to continue the conversation and take a few more questions or comments. I'd be really pleased to do that. I just want to thank you all so much for those of you who provide your excellent perspectives on the economy and for being a part of the Fed system.

Thank you.

Oh, you are wonderful. Thank you so much. Appreciate it. And we have a gift for you as well. We do.