A conversation with Dallas Fed President Lorie Logan

Good afternoon. Good afternoon. Are you able to hear me? Does that work? Okay, great. I'm a little bit shorter. Oh, thank you, Arturo, for the generous introduction, and it's just great to be back here. In my travels, I have many opportunities to thank people for welcoming me to their communities, and the welcome is never warmer than it is here in El Paso. But I want to turn the tables a bit today and I want to welcome Arturo to the Dallas Fed. Our regional executives build the relationships that connect the Federal Reserve to the communities we serve. And those relationships help policymakers like me understand the economy. Equally, those relationships afford all of you the opportunity to help shape the Federal Reserve's work. And I'm so pleased to have a leader of Arturo's caliber filling this role. I'm also delighted that Roberto Coronado, who I think all of you know and have worked with extensively and who preceded Arturo as regional executive, will be remaining in El Paso. But he'll continue to connect with the community here while bringing his leadership to the entire 11th Federal Reserve District. So thank you, Roberto, for all that you do. It's wonderful to see so many special guests, including current and former board members of the Dallas Fed and our El Paso branch. And I'm so honored to share the stage this afternoon with distinguished public servant UTEP's president Heather Wilson. Dialogues like the one we're having this afternoon are at the heart of the Fed's mission. The Federal Reserve system is our nation's central bank, but it is a decentralized institution. The system includes the Board of Governors in Washington and 12 reserve banks serving districts all around our country. And the reserve banks in turn have an additional 24 branch offices. And I'm proud to say the Dallas Fed's El Paso branch is believed to be the very first of those to open its own permanent building. The Paso del Norte has been a strategic economic crossroads for centuries. In 1918, geography made El Paso a pivotal location for the Fed to distribute cash and clear checks. Today, the office here provides a unique vantage point on trade and migration. El Paso is the Fed's only branch along the border, and it also serves as the center of expertise on energy production in Texas and New Mexico. Deep regional roots strengthen the Fed in two important ways. In America's wonderfully varied economy, local engagement lets policymakers see beyond the aggregate statistics to understand how national decisions affect every corner of our country. The Fed's decentralized structure also allows each community to hold us accountable for hearing your voices through the boards of directors that govern each reserve bank head office and branch. My colleagues and I care deeply about hearing your voices because we feel a profound responsibility to all Americans. The Fed's decisions affect every family, every business, and every community. It's our duty to make those decisions as thoughtfully as possible for the long-term strength of the US economy. With that in mind, before President Wilson and I sit down for our conversation, I'd like to share a few words about the economic and monetary policy outlook. Of course, these are my views and not necessarily those of my FOMC colleagues. Congress charged the FOMC with setting monetary policy to deliver maximum employment and stable prices, and we call that our dual mandate. Both aspects of it are crucial for America's well-being. A low, predictable inflation rate lets families and businesses plan for the future. And stable prices support a strong and growing economy where people who want to work have opportunities to do so. Looking first at inflation, it's just taking too long to return to the FOMC's 2% target. The FOMC measures inflation with the price index for personal consumption expenditures or PCE. PCE inflation surged past 7% in the aftermath of the pandemic. It's come down meaningfully since then, yet it still ran close to 4% over the past 12 months. A good deal of the excess inflation over the past year has come from temporary factors such as tariffs and energy price increases, but not all of it. To get a sense of where overall inflation is headed, I look to metrics that strip out volatile categories or unusually large price swings. These metrics don't always speak in unison. I follow a range of indicators to get a more complete picture. Core PCE inflation sets aside volatile food and energy prices. It was 3.3% for the past year. The Dallas Fed trim mean PCE inflation rate sets aside the most extreme price changes each month. It's been lower than core inflation, 2.3% for the past year. The trim mean usually sends a reliable signal about where overall inflation will trend. At the moment, however, my staff's research cautions against putting too much stock in low readings of the trim mean. A change in the mix of price increases and decreases is causing the trim mean to drop too many price increases, and that can pull the trim mean below the underlying trend in inflation. This technical factor currently has less influence on another measure that sets aside extreme price changes, the Cleveland Fed's median PCE inflation rate. That rate was 2.8% over the past year. The New York Fed's multivariate core trend model uses statistical techniques to filter out noise. It's moved above 3% this year. Dallas Fed researchers have also estimated the amount of inflation directly attributable to tariff increases. As tariff rates stabilize, they will remain a factor in the level of prices, but they should not contribute further to inflation, which is the rate of increase in prices. So, putting together all these different analyses and ways of looking at the data, inflation appears to be trending to the mid-2s, not all the way back to our 2% target. The most important reason to bring inflation back to target is simply that the US economy benefits from price stability. But in addition, above-target inflation can become entrenched if it persists too long. When consumers, workers, and businesses expect higher inflation, those expectations feed back to prices and wages. Unanchored inflation expectations would make it costly to restore price stability. And I'm closely watching movements in market prices for short-term and long-term inflation compensation as well as surveys of inflation expectations. Meanwhile, economic activity remains strong. Consumer spending is robust, partly supported by wealthy households' investment gains. Although higher energy prices have weighed on lower-income households, the US economy as a whole has weathered the shock so far. In the aggregate, corporate earnings are going gangbusters. S&P 500 companies' earnings grew more than 25% in the first quarter compared with a year earlier. While tech companies experience some of the strongest growth, gains remain widespread. The median S&P 500 company's earnings rose 14% year-on-year. Financial conditions are accommodative and AI investment continues to boom. Productivity improvements from AI could eventually reduce inflation. However, the potential size and the timing of those gains are uncertain. The demand is already here. The labor market appears stable and broadly balanced. The unemployment rate has hovered around 4.3% for the past year. Employers are adding an average of about 50,000 jobs per month. That might sound low, but it's in line with the slow growth rate of the labor force. These conditions indicate to me that monetary policy is not restraining the economy. I'm increasingly concerned that higher interest rates could be necessary later this year to fully restore price stability and appropriately balance both sides of the Fed's dual mandate. However, these decisions call for thorough analysis and debate. The seven members of the Board of Governors and the 12 presidents of the reserve banks all participate in FOMC meetings. Our deliberations take into account ideas and data from across the country, informed by the Fed's network of regional offices and conversations like the one we're having here today. I value my FOMC colleagues' perspectives and I look forward to discussing the economic outlook and policy response with them at upcoming meetings. So, thank you for the opportunity to share some opening remarks. And I'd like to invite President Wilson to join me on stage, and I'm really looking forward to the discussion and to all of your questions.

Well, thank you. I look forward to that, and I just wanted to again thank you for hosting us here on UTEP's campus. I know we have some first-time visitors with us here today, and this is just a beautiful place and an amazing institution, and the work that you do. And I just want to thank you for all of your service and the work you do, and thank you for sending so many great students to the Dallas Fed. Continue to send them. So, the Federal Reserve, I would highlight two very unique aspects of the Federal Reserve system that I think are really important for understanding us and understanding our work. The first is that the Federal Reserve is a decentralized institution, and that's different than many central banks around the world. And what I mean by that is we are the third attempt at our nation's central bank. Actually, it's in 1913. That was our third attempt. And the key difference in the third attempt was that it was going to be a federated institution with representation all across our country and not one that's centralized in Washington DC. And that federated nature has been a key aspect of I think the central bank's success in that it brings the views from all across our very nation to the FOMC table in thinking about the policy decisions we need to make for the country as a whole. I think that's a really important and unique aspect of the institution. It also gives us an opportunity to be out all across our country talking about the work that we do, and I think that is very special. The second key aspect is that the system is set up for the policymakers to serve long terms. So there are two types of policymakers on the FOMC. There are seven governors that are politically appointed positions with 14-year terms. So very long, very long terms. And then there are 12 presidents who serve five-year terms but are selected by local leaders that serve on their board of directors. So, it's those local business and community leaders that are determining the leaders of that district and holding them accountable for representing and doing the work in that district. Both terms are long, and that means that we are insulated from decisions that are based on short-term political needs at the time of the country. We are making long-term decisions that support long-term prosperity for our economy. So if you walk away from anything today and you're new to us in the Federal Reserve system, I just encourage you to think about two unique aspects: that we're a federated institution that supports our country as a whole, and that we have policymakers with long terms so they can be thinking about the long-term interests of our economy.

Well, last year I had the opportunity to be in Mexico to celebrate the 100th year anniversary of the central bank in Mexico, and it was a good reminder to me about the power and importance of independence because Mexico had gone through a period when they weren't independent, and the inflation results in the period before they became independent and the period since are dramatically different. And that's because the policymakers were really able to focus on those long-term economic decisions in support of price stability. So the inflation results were very different, and if you look at research throughout history and across countries, the results are significantly different and clear that inflation outcomes are better when central banks are independent. And that long-term terms that we serve, as either those who are politically appointed as governors or selected by their local areas as presidents, allows us to really look at the long-term decisions and make those hard choices about interest rates or other decisions about our balance sheet to ensure that we're thinking about long-term economic prosperity and not the short-term political issues that are there. So, independence is critical, and I think the data throughout history and across countries really shows the results in terms of inflation dynamics.

That's a great question. You know, when I think about the work that we do, I think about us as an institution and the staff of the institution, and I think about me as a policymaker. And from the staff's perspective and the institution, the Dallas Fed, we spend a lot of time collecting data, conducting surveys, hosting roundtables, making phone calls to business and community leaders. And then we have a team of economists that are doing independent research about economic issues both that affect the district and affect the country as a whole. And so all of that information is captured and shared publicly about what they're learning about how different people and businesses are experiencing the economy. Sometimes it comes out in our surveys. We have a number of surveys that we do that are highly followed. You know, one of them is the energy survey that we do because we have a lot of energy businesses here in the district, and every quarter we produce a survey of what energy CEOs are saying, and it gives people a sense of what's happening in that sector of the economy. We do one in banking, we do one across Texas manufacturers and service sectors. So all that information we collect and we release, and it helps complement the hard data that we're getting at a national level and understanding what's happening. And all the conversations that we have with business leaders and community leaders is information that we gather and we synthesize, and we put that against our models and against the data that we're collecting to understand not only where the economy is today but where we think it's going. And then I, as a policymaker, and my colleagues, my 11 colleagues around the country, are doing the same thing. We take that information and we share that at the FOMC table. When we're contributing, you know, how's the economy look both in the 11th district and in the country as a whole, we each have an opportunity to share those perspectives, and then we bring those perspectives to the decision or the vote that we're providing at the table on monetary policy. And those views, you know, are really important for monetary policy, but they also come into play in decisions about the payment system, about bank supervisory policy, and areas of financial stability as well. So, I just want to thank you. I know I've seen many of you in some of our roundtables, and those who serve with us as directors and advisory council members. The expertise, the advice that you bring is so important to the work we do, and I just want to thank you for that continued engagement.

I think one way of thinking about that is to look at our dual mandate of inflation and maximum employment. On the inflation side, of course, we're going to look at a variety of metrics, and I talked about a number of them in my remarks. Our 2% target is based on PCE inflation, but we're looking at a wide range of measures, and it's important to understand where inflation is today, and we look at the data to do that and to really think about it. But we're really asking is where is inflation headed? And that's what's important. And a number of those measures I talked about are the underlying trends of inflation that help us understand, you know, where do we think inflation is headed over the next year. And that's what we're really trying to do. Hard data, we have a lot of hard data. It's often revised, and it also is lagged. And so these conversations that we're talking about are what we use to really think about where things are headed. And the survey data or the conversations and roundtables can sometimes get us a sense of, you know, whether we're at a turning point in the data or the trends we've been seeing. So you want to bring those two things together. So we're looking at a whole set of data around inflation, and then we're looking at a whole set of data around labor markets. We're looking at job openings, we're looking at turnover rates, we're looking at wages, we're looking at monthly employment gains, the unemployment rate, a whole host of metrics that we bring together to understand the state of the labor market. And then there too, we would look at surveys. We talk with business leaders about how they're planning for employment, labor in their own business, and put those two things together about where we think the labor market's headed. So that's just one way of framing all the data. The most wonderful thing about working in the Federal Reserve is you just have an incredible amount of data to look at. And one of the things about going through the COVID experience is that we invested a lot in high-frequency data because the economy was moving so quickly. So we have high-frequency data that we're also looking at today, you know, that we didn't even have years previously. So, that's a way to think about that data. But I would emphasize that it's not just the hard data. It's not the models that help us interpret the data, but it's also the conversations and the information that you share that helps us really understand what's happening.

Well, I characterize the labor market as being stable. We see an unemployment rate of 4.3% and that's been pretty steady for some time now and it's right around what economists call the natural rate of employment. So it looks stable when you look at that. We also look at a number of measures, job openings, turnover, other measures that help us characterize it. But I would characterize the labor market as stable and I think balanced at this point. I do hear and it's been very notable to me in many of the conversations here in El Paso that there are areas of strength in the labor market. For those who are less familiar with the area, there are a number of data centers that are either in the planning stage or in the construction stage and that's creating significant demand for labor in areas of construction.

Electricians. I know some of you have said it's hard to find an electrician when you have an issue at home. Plumbers, those that are really supporting the development and construction of those data centers. And we're seeing wage growth in those particular areas. I've also heard from some in the manufacturing area that it's challenged to find some in advanced manufacturing and the importance that they're placing on working with community colleges and others to develop a pipeline of skilled labor to support that growth in those areas. So, I think those are the ones that at least in our conversations here in El Paso, hearing about potential signs of strength, but I would characterize the overall labor market as one that's stable.

Well, the labor market has been a... I mean, immigration has been an important, a very important theme for the labor market. We were seeing, we were in a period as this community knows very well where we were seeing very large numbers of immigration coming across the border right here. And now we are in a period where the border is secure and we're not seeing any migration coming over and so the labor market dynamics have shifted significantly just in the last year and a half or so. To labor supply, given we're not seeing growth from immigration and the demographics as they are in the US, we just don't have labor supply growth. And so when we look at monthly payroll gains and those numbers seem low, they've been averaging about 50,000, I mentioned in the remarks, those seem low, that's still healthy when you have labor supply, what we call the break-even level of payroll gains that needed to keep the unemployment rate steady is fairly low, near zero. So I would say that immigration has certainly had a meaningful impact on the labor market and it's important to understand the labor supply side of the story when we're looking at labor demand and putting those two things together is another reason why I see the labor market as being stable right now.

Well, I don't think I have to say to this community that the impact in the Middle East has been the most significant disruption in energy in history. And not just oil and gas, many other products that were coming out of the Strait of Hormuz, fertilizer, helium, you know, other oil derivative type products. So, a tremendous disruption and that is having an effect on prices. We're all seeing the impact of that on prices of gas and that is feeding through to the prices of other goods and services and I heard about that in many of the conversations with business and community leaders. The key issue is how long the Strait of Hormuz is going to be closed and even when it opens how long it will take to restore the flow of those products. Some facilities have been damaged. It'll take quite some time for them to fully recover if they're able to fully recover and the ships are all in different places at the moment. So, it's going to take time even after the Strait of Hormuz is opened. And there's a lot of uncertainty there. So, the key economic impacts will depend on the length of time until we've restored that flow. I think we in the US have been less impacted because we are now an oil and gas exporter rather than an importer relative to other countries around the world that are importing. So the effects have been a little bit less in the US than in other countries. But still the inflation effects have been there, some impact on the consumer. I know those that are really feeling those higher gasoline prices in particular. So some effect on the consumer but in the aggregate because we are a producer the effects have been more on the inflation side than on the growth side. So to me the risks are tilted more on the inflation side because of the large disruption that we've seen but there's a lot of uncertainty and the scenarios could play out in different ways. So, we're really focused on the length of time till we see the Strait open as well as how long it takes to recover some of those important facilities.

Well, this has been a really special trip for us and our team. We've had roundtables here in El Paso, but we also did a roundtable in Juarez with leaders and had the chance to tour a manufacturing site on the other side of the border. I've learned a tremendous amount and a number of issues have really struck me. I think I would highlight two or three. You know, one, in every conversation we're talking about AI. I'm sure all of you in just about every conversation are talking about AI, but here in particular the demand that's being created from the buildout in the data centers and that's affected the trade flows as well because many of the firms on the other side of the border have changed the product mix in terms of the type of products that are now flowing into the US to support that data center buildout and the labor shortages that it's causing because those projects are so big. So, I had a sense of those themes, but being up close to them and hearing directly from those affected certainly struck me. I would say a second is on trade and tariffs. Many of the tariff policies have created uncertainty for businesses. Should I invest? When to invest? How are things going to evolve over time? Here uniquely we've seen an increase in products that are USMCA eligible and so the actual effects so far haven't been as significant because they've come through the USMCA arrangements. But there's uncertainty about upcoming negotiations and the USMCA. So talking with those directly affected, I got a sense of just how uncertain it is in terms of investing more and we were in a theme of nearshoring and reshoring where there was a lot of interest in investment and that has paused while these negotiations take place. And so hearing directly from them about just how that uncertainty is playing out really struck me. And I think third is infrastructure and the challenges of and importance of infrastructure. This is an incredible avenue for cross-border trade and just really integrated communities, integrated supply chains and the infrastructure whether it's bridges, electricity, water, those are critically important to the long-term strength of those economic arrangements. And I've heard a lot about all of those issues as well.

I'm really glad you raised that point because I think sometimes when people are looking at the statistics, they don't count the fact that this is one area, one metropolitan area. So the numbers don't show up in the strength of this. And for those who are new or haven't had the chance to be here in this really special part of our country, it is one community with the border in between. But the flow of people, the flow of capital, the flow of goods back and forth is just incredible. And I think that speaks to why we at the Dallas Fed, you know, think the Global Institute is so important. Mexico is our number one trading partner. Now, a lot of that is happening in the state of Texas and it's important for our researchers to really understand the flow of capital, flow of goods, and the flow of people as it affects the economy. We're doing extensive amount of research. But we're also bringing people together. So it's not just about the academic work that we do but it's also holding roundtables where we're bringing people from both sides of the border who are part of these integrated supply chains and talking about what's really happening and what are the issues that are potentially causing frictions or where are the opportunities that may not be there to really support economic growth. So the Global Institute is about research but it's also about bringing people together to talk about the issues that are most important particularly given that Mexico is our number one trading partner in the US.

Yeah, that tequila is in my office. No, I didn't say that. Who has a question here, sir?

Look, as I said in my remarks, when I look at inflation on the inflation side, it's too high. It's trending in the wrong direction and I see further upside risks. On the labor side, I see that as stable. And on the growth side, growth is very solid. We're getting a great boost from AI that's going both through the consumer through the wealth channel but also through business direct investment. So the overall economy looks solid and financial conditions are very, I think financial conditions are easy given the high stock market, open capital markets and loan demand looks strong from what I'm hearing from our banks. So I'm just not sure that policy is very restrictive. It's to me it looks neutral or perhaps even a bit loose. And in order to return inflation all the way to our 2% target, as I said, if I look at a variety of measures, I think underlying inflation looks closer to two and a half, mid-2s to me than it does headed all the way back to two. In order to do that, we need at least mildly restrictive policy to finish the job. So that's how I put that picture together.

That's a wonderful question. I want to actually turn to Dr. Wilson on two things because I understand two important things happening here at UTEP that I think are really relevant to the question that you and I have talked about. You told me more about. One is the new program that you're thinking about helping graduates get into the job market and the connection you're making to employers. And I think that's really powerful. And the second is the new program you're doing in mining as a new area. I wonder if you could mention both of those because I think they're relevant to the question and when I think about our role as a Fed, I really think about bringing business, community, educators together to think about these workforce pipelines and really connecting workforce challenges and issues to business and community leaders and both of those programs really speak to that.

I think we've been calling you. But I hope everyone else takes that. Thank you.

Well, I think I should be turning the question to you to tell me where you think it's going. You know, the health care sector's a critical part of our overall economy and so something we follow greatly. A lot of the job gains that we have been seeing in recent months have come from the health care sector. And I think there are really important questions given national policy changes and the effects that that's having on the insurance side, what that means for those that we serve and also just the demographics and the workforce that's going to be needed to support the health care needs of our aging population. And so we're paying a lot of attention to that issue as well. But I'd welcome your perspective on what you're seeing in the healthcare sector and how you think it's affecting the economy that we should really be looking into.

Yeah. I was in Japan last week at a conference on the Bank of Japan put together on global imbalances and I gave some remarks on some imbalances that I'm wrestling with. One in energy, one in the financial markets, and one of the areas I talked about in those remarks is overall demographics worldwide. Just the slowing demographics that we have in the aging population and how that has significant impacts for the way we need to think about capital and ultimately the fiscal position of countries worldwide. So, it's a really important issue and one we're paying attention to. It's a longer term, medium-term, longer term issue. But I think watching that area is really important.

Yeah, the sentiment data, you know, really hasn't been a good indicator in terms of where consumer spending is going for quite some time. There's a lot of research about what might be driving that and those issues. You know, I think an important issue and we see this discussed broadly is affordability is such a front and center issue for so many households and that affects the way I think they think about sentiment more broadly. And I think that is influencing the overall perspective. High level of uncertainty about national policies and geopolitics I think is also influencing the sentiment and those scores. So something we look a lot about, think a lot about, but hasn't been a good indicator of consumer spending when we look at the statistical relationship more recently.

Well, thank you. Dr. Wilson and I discussed this issue earlier today as I was visiting with business and community leaders and all the roundtables and all the discussions I had, that was a front and center issue on the minds of everyone. You know, as the role of the central bank, our responsibility is our dual mandate, price stability and maximum employment and that's what I'm focused on. But we also bring people together to talk about issues that are important for economic growth and stability and we'll continue to bring people together to have those conversations. And so I appreciate hearing from you and I appreciate the importance of the topic and the issue for our political leaders here locally and nationally. Not where I am an expert. But I do want to make sure that our team is bringing together people to talk about the issues. There's interesting research questions that can be asked that we can contribute to and our economists can look at. So something certainly we may do because we're always looking at the economy and thinking about that both here in El Paso. We have a number of El Paso indicators and researchers focus and also Texas as a whole. So those are other areas that we can think about and look into.

I appreciate that. I think that's something we will take back and our team will take back. I think data and survey data, quantitative data that we have that's valuable. I think that's important. We also do a lot of work with connecting with Texas 2036. That's also another organization that's collecting a lot of data and really thinking about data and data integrity and we can be sure to raise that with that type of organization. But it's a great question and one we'll take back and think hard about.

Thank you for sharing that. Thank you for sharing.

Well, thank you. Thank you for having me. It's such a special place. I really enjoy it.