Opening Remarks for ‘Energy and the Economy: The New Energy Landscape’ Conference

Dallas Fed President Lorie Logan gave this address to open a conference hosted by the Federal Reserve Banks of Dallas and Kansas City in Houston.

November 10, 2022

Thanks for the introduction, Daron.

It is a pleasure to open today’s event. This is the seventh joint conference on energy by the Dallas and Kansas City Feds, and the issue is more urgent than ever. As a newcomer to this region, which is so central to the energy economy, I am eager to learn and happy to participate in this conference for the first time.

I would like to thank everyone who worked so hard to put this event together, and I especially want to thank Esther George, President of the Kansas City Fed, for her cooperation in this effort over the years. President George has been a highly influential leader in all aspects of the Federal Reserve’s mission during his 40 years of service. He is a wise voice in our monetary policy debates; has taken a leap forward in our nation’s payments system as an executive sponsor of the upcoming FedNow service; and has been a strong advocate for effective and efficient regulation of banks, especially community banks, throughout his career. President George will retire in January, but before that, he will do us the honor of giving today’s speech. Esther, I’m so grateful for everything I’ve learned from you, and I know I’m not alone when I say that.

The theme of today’s conference is “Energy and the economy: the new energy landscape”. I’d like to share some thoughts on energy and the economy to start our discussions. As always, these opinions are my own and not necessarily those of my colleagues at the Federal Open Market Committee (FOMC).

Energy prices have been very fluctuating this year. The previous month’s West Texas Intermediate crude futures price was up more than 52 percent for the year, although it has since retreated, with natural gas up 20 percent from a year ago at Henry Hub and 61 percent in continental Europe. . Significant pressure and volatility in energy prices has resulted from Russia’s war on Ukraine and Russia’s weaponization of energy exports. Although European nations have worked hard to build up natural gas inventories and make energy conservation plans, Europe still faces a difficult winter even in the best-case scenario. This context is a daily reminder that energy plays an important role in economic life and national security.

Energy is especially important here in the Tenth and Eleventh Federal Reserve Districts, which together produce nearly half of the nation’s energy. Texas leads the nation in production of oil, natural gas and wind power, and is second in utility-scale solar installations. Our region is also a national leader in refinery capacity and petrochemical production. In Texas, oil and gas production is a major employer and accounts for 11 percent of the state’s GDP and nearly half of its exports. With the addition of chemicals, the energy share of the state’s exports rises to more than 60 percent.

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The Dallas Fed is deeply committed to understanding the impact of energy on regional, national and global economies. We do this through our public outreach and research, including our quarterly energy survey of 200 oil and gas companies in Texas, southern New Mexico and northern Louisiana. Thank you to all of you who participated in the survey.

We also bring people together at events like today’s conference, our Energy Advisory Council meetings and other important gatherings to address issues and identify constructive ways forward.

As Daron said, my years of experience in finance have given me a deep understanding of the criticality of energy markets and how events in those markets can affect the broader financial system. But I am relatively new to the real side of energy economics, namely how energy is produced, distributed and consumed. So while I’m fortunate to be part of the Dallas Fed’s energy team and have learned a lot from visiting with some of the key energy leaders in the Eleventh District, I look forward to hearing and learning more. I am especially looking forward to today’s discussions and connecting with all of you.

A deep understanding of the energy ecosystem is essential for the Federal Reserve to best fulfill the core elements of our mission: to implement monetary policy to promote maximum employment and stable prices, to promote the stability and efficiency of the financial system, and to support community development. The evolution of the energy sector affects economic production, employment, inflation, investments and credit markets. Likewise, Federal Reserve policies significantly affect the energy sector, both through changes in macroeconomic conditions and through changes in financial conditions that affect investment.

Today’s economic conditions are complex, but they can be summed up in five words: Inflation is far too high.

Not only is inflation well short of the FOMC’s 2 percent target, but with aggregate demand continuing to outpace supply, inflation has repeatedly been higher than forecasters expected. This morning’s CPI [Consumer Price Index] the data was welcome, but there is still a long way to go.

Price stability is fundamental to a healthy labor market and economy over time.

  • When inflation is high, it is difficult for families and businesses to plan for the future and it is difficult for financial markets to direct capital to the most productive uses.
  • High inflation leaves many workers increasingly behind as their wages fail to keep pace with the cost of food, gas and other necessities.
  • High inflation makes the business cycle more volatile, undermining long, stable expansions that particularly benefit the weakest in society.
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In short, high inflation is a drag on our economy. The longer it continues, the worse the drag, the greater the risk of high inflation becoming entrenched and the greater the cost to lower inflation. The Federal Reserve has a dual mandate for monetary policy—maximum employment and price stability—but to sustainably achieve the maximum employment portion of the mandate, I believe that monetary policy must now focus on immediately restoring price stability.

The FOMC has widened its target range for the federal funds rate by 3.75 basis points since the start of the year, including a historic increase of 75 basis points over the past four meetings. Financial markets expect significant price increases, and the FOMC is also removing monetary accommodation by reducing our asset holdings, as described in the plans the FOMC issued in May. As a result, broad financial conditions have tightened significantly. The yield on the 10-year Treasury rose to more than 4 percent from 1.51 percent earlier this year, and option-adjusted yields reached nearly 6 percent on investment-grade corporate debt and about 9 percent on high-yield debt. . Thirty-year fixed mortgage rates rose to 7.32 percent from 3.27 percent. Importantly, real or inflation-adjusted interest rates, as measured by the yields on Treasury Inflation-Protected Securities, are significantly above zero along the yield curve.

These tighter financial conditions begin to balance demand with supply, especially in interest rate-sensitive sectors such as housing.

Cooling the economy enough will eventually bring inflation back to our target. But this process has only just begun. The labor market remains very tight, and wages continue to grow well below the rate that would be consistent with 2 percent inflation.

You may have heard the debate over whether tighter policy will put the financial system at risk. It is important to remember that higher interest rates must cause pressure. As you well know, some investments that had a positive net present value at last year’s interest rates don’t make sense at today’s higher rates. Some projects will have to be closed. Financial markets, businesses and the economy will have to adjust after so many years of near-zero rates. These adjustments are expected and appropriate to moderate demand and reduce inflation.

So far, I think we are seeing a normal response from financial markets to a tighter monetary policy. Although credit costs continue to rise and issuance continues to slow, credit markets remain open for most borrowers. And while liquidity conditions in major financial markets have been strained, these strains so far appear to be primarily due to high economic uncertainty and volatility driving up market-making costs, rather than the other way around.

While inflation creates difficulties in the short term and hurts the economy’s long-term strength, falling home prices, a cooling labor market and tighter financial conditions create difficulties.

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I believe the FOMC should do everything we can to restore price stability that will sustain a healthy economy in the long run, but we should also try to avoid spending more than necessary if we can.

In my career in the financial markets, I’ve learned that financial conditions usually evolve smoothly, but sometimes they take a sudden turn for the worse, with serious consequences for the financial well-being of households and businesses. As financial conditions tighten, I am alert to the possibility of non-linear and unexpected responses to further policy tightening.

While I believe that it may soon be appropriate to slow the pace of rate hikes in order to better assess how financial and economic conditions are evolving, I also believe that a slower pace should not be taken to represent easier policy. I don’t see that the decision about slowing down is particularly related to the input data. The austerity of the policy comes from the entire policy strategy, not just how much the rates rise, but the level they reach, the time spent at that level and, above all, the factors that raise or lower them further. The FOMC can and should adjust other elements of policy to provide the right conditions, even if the pace slows. We must remain steadfast in our 2 percent inflation target.

I will look at a wide range of information to assess whether the policy is restrictive enough. For example, I will look at the evolution of the labor market and the economy, as well as about real returns and the accuracy of inflation forecasts, among other things. Keeping real interest rates well above zero would help dampen demand, which I expect will reduce inflation. Conversely, inflation forecasts that consistently fail on the low side do not foster confidence that we understand the inflation process well enough to predict success.

That’s a lot of words to explain the economic situation in five words. So I sum it up. Inflation is far too high. The FOMC must restore price stability, but it must also continue to better assess how financial and economic conditions are evolving. This is how we can provide a healthier economy, with stable prices and maximum employment, which is the responsibility of the Federal Reserve.

Thank you. I look forward to learning from all of you today, and especially to listening to President George’s keynote speech over lunch.

About the author

Lorie K. Logan is President and CEO of the Federal Reserve Bank of Dallas.

The opinions expressed are my own and do not necessarily reflect the official positions of the Federal Reserve System.

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