On Monday, many officials of the Federal Reserve, including Dallas Fed President Logan, Minneapolis Fed President Kashkari, and Kansas City Fed President Schmid, all support gradually lowering interest rates, which means slowing down the significant rate cuts expected in September.

Influenced by the hawkish remarks of Federal Reserve officials, the market's expectations for interest rate cuts next year have decreased, causing a sharp rise in U.S. Treasury yields. Traders are reducing bets on Fed interest rate cuts next year, expecting a total cut of 133 basis points by the end of September next year. The 10-year U.S. Treasury yield rose by 11 basis points, nearing 4.19%.

Dallas Fed President: Interest rate cuts should be cautious.

On Monday, Dallas Fed President Lorie Logan stated that interest rate cuts by the Federal Reserve should be approached cautiously, as there is still uncertainty in the U.S. economic environment. "If the economy develops as I currently anticipate, gradually lowering the policy rate to a more normal or neutral level will help manage risks and achieve our goals."

Logan said that reducing restrictive monetary policies will help the Federal Reserve balance the risks faced in stabilizing inflation and maximizing employment. However, any shocks could affect the path towards normalizing interest rates, including factors determining the speed at which monetary policy should progress, and where rates should stabilize.

Logan revealed that businesses in the Dallas Fed's region have expressed optimism about steady growth in the next six months, but there are also many uncertainties.

The Federal Reserve initiated this round of easing at the September meeting with a significant 50 basis points cut right from the start. However, subsequent data showed that the U.S. labor market was stronger than Fed officials had expected. Currently, the market widely expects the Fed to only cut rates by 25 basis points at the November meeting.

Logan stated that the Federal Reserve needs to maintain flexibility and is willing to make adjustments when appropriate.

Logan previously served for many years at the New York Fed. On the same day, she also discussed the assets and financing market dynamics of the Federal Reserve.

Logan mentioned that the market liquidity remains very abundant. Although the Federal Reserve's use of overnight reverse repurchase tools has been declining over the past two years, the current balance is still much higher than before the COVID-19 pandemic, providing additional liquidity buffer. Logan added that in the long run, these balances should be negligible. If with the increase in repo rates getting closer to the reserve rate, and the balance of this tool does not decrease, then lowering the overnight reverse repo rate may be appropriate.

Logan stated that recent pressures in the money markets seem to be temporary, and policymakers should tolerate these minor pressures to achieve an effective balance sheet size.

Regarding the Federal Reserve's balance sheet, Logan pointed out that mortgage-backed securities (MBS) continue to be a major component of the balance sheet, expected to remain so in the coming years, but the Fed plans to eventually hold mostly U.S. Treasury bonds.

Logan reiterated her call for all banks to sign and be prepared to use the Fed's emergency liquidity tool - the discount window when necessary. She also suggested that the FOMC may consider at some point central clearing for its standing repo facility, similar to what the SEC does for the broader U.S. Treasury market.

Minneapolis Fed President: Expect future rate cuts to be more moderate.

On the same day, Kashkari, a 2026 FOMC voter and the President of the Federal Reserve Bank of Minneapolis, said he supported the significant rate cut by the Fed last month but reiterated support for slower rate cuts over the next few quarters. 'Currently, I expect some more moderate rate cuts over the next few quarters to bring rates to a neutral level, but this will depend on the data.'

Kashkari stated that the current monetary policy of the Federal Open Market Committee (FOMC) is still putting the brakes on the US economy. However, the resilience of the US economy makes him doubt whether the neutral interest rate is higher.

Kashkari stated that if he wants to accelerate the pace of interest rate cuts, he needs to see solid evidence of rapid weakening in the US labor market. If the US government budget/fiscal deficit "skyrockets to the moon", then the policy rate of the FOMC will be higher.

Kashkari pointed out that American consumers are feeling truly financially constrained. The previous inflation issue in the USA was not caused by the labor market. It is difficult to analyze whether tariffs have caused a dangerous inflation cycle.

Kashkari also mentioned that geopolitical risks have not yet significantly impacted the crude oil market, which has always surprised him.

Kansas Fed President: Taking a cautious approach

US Kansas Fed President Jeffrey Schmid expressed a preference for supporting the cautious and gradual implementation of monetary policy by the FOMC to avoid large movements. He hopes the policy cycle will be more normalized, with the Fed maintaining economic growth, price stability, and full employment through fine-tuning. “Especially considering the uncertainty about the end point of the policy, I make cautious decisions, hoping to avoid exacerbating financial market volatility and minimizing market fluctuations.”

Schmid believes that slowing down the pace of interest rate cuts will enable the Fed to find the neutral interest rate. “In the absence of any major shocks, I think we can achieve such a cycle, but I believe this needs to be done cautiously and gradually.”

He expects that by the end of this round of interest rate cuts by the FOMC, the rate may be significantly higher than before the COVID-19 pandemic. The Fed should eventually cut rates to the lowest multiple, with uncertainty present.

Schmid pointed out that the labor market in the usa is normalizing and not significantly deteriorating. He has "reasonable confidence" that inflation will fall back to 2%.

Regarding the reduction of the balance sheet of the Federal Reserve in the usa (QT), Schmid tends to adjust assets with shorter durations by a smaller magnitude.

Editor/Rocky