Insights 
VT 
Federal Reserve Bank of Dallas President Lorie Logan expressed concerns about ongoing inflation pressures. Despite a weakening labour market, she suggested that policy actions might unintentionally ignite inflationary pressures.
Logan noted that tariffs are a contributor to inflation, and expressed concern over persistent non-housing services inflation. She acknowledged the risks associated with both increasing and decreasing inflation expectations due to tariff effects.
Stimulating Demand in a Balanced Labor Market
Stimulating demand in a balanced labour market could exacerbate price pressures without improving employment. Logan highlighted the need for cautious consideration regarding further rate cuts, as current monetary policy is only modestly restrictive.
She stressed that the Federal Reserve remains distant from achieving its inflation goals, suggesting a need for careful navigation. The balance between addressing inflation and considering labour market risks remains delicate.
The Federal Reserve is signaling that we should be cautious about expecting further rate cuts, even with a slowing economy. The market has been pricing in a greater chance of easing, but these comments suggest bets on lower short-term rates are now riskier. We should reconsider positions that are heavily dependent on the Fed cutting rates before the end of 2025.
The specific worry about non-housing services inflation is a critical warning for us. The most recent September 2025 CPI data showed this component stubbornly high at 4.5%, confirming that underlying price pressures are not fading quickly. This stickiness is the primary reason the Fed is hesitant to declare victory and pivot to rate cuts.
Level of Uncertainty and Market Implications
This level of uncertainty from a key Fed official points towards higher implied volatility in the near future. The mention of both upside and downside risks means the range of possible outcomes for interest rates and the economy has widened. Derivative traders might consider strategies that benefit from this, such as buying VIX calls or using straddles on major indices.
We have to balance the weak labor market data against this persistent inflation. The September jobs report showed a gain of only 95,000 jobs, underscoring the slowdown, but the Fed is clearly stating that inflation is the side of its mandate where it is “furthest away” from its goal. This indicates that even more labor market weakness may be tolerated before officials are comfortable cutting rates.
Looking back, the aggressive rate hikes of 2022 and 2023 were meant to be decisively restrictive, yet the view now is that policy is only “modestly restrictive.” This suggests the neutral rate of interest might be higher than we previously thought. Consequently, we should be prepared for interest rates to remain elevated for a longer period, supporting the U.S. dollar and potentially acting as a headwind for equities.
