By Michael S. Derby
April 2 (Reuters) - Dallas Federal Reserve President Lorie Logan said on Thursday that U.S. oil producers are unlikely to boost output and shield consumers from higher gasoline prices any time soon.
The price U.S. producers say they need to see to start drilling is just shy of $70 a barrel, well below the current price of around $110 a barrel, Logan said during a conference at her regional Fed bank. She added that prices at or above that breakeven level would need to be sustained
for the firms to make the necessary investment that could eventually bring relief for consumers.
U.S. oil firms "need to have a sense that those higher prices are going to stay around for a while, and so I am not hearing that we're going to see a dramatic increase in production here in the short run," she said.
Logan's comments suggest that energy price rises tied to the U.S.-Israeli war with Iran will remain a near-term problem for inflation and overall economic activity, even though she said the U.S. has buffers that other nations closer to the conflict don't.
The Dallas Fed chief noted that inflation continues to be one of her chief economic concerns. "On the inflation side, even before the conflict in the Middle East, I wasn't convinced that we were headed on a path all the way to our 2% target," she said. "It's incredibly important to restore price stability, to get inflation back to 2% because stable inflation is just the bedrock for a strong economy."
Echoing the monetary policy view of many of her colleagues, Logan said the current uncertainty means that the Fed should watch and wait while taking in information on the economy’s performance.
"I really like thinking about things in scenarios right now," Logan said. "I think policy is positioned to adjust to the data as it's coming in, and we're prepared to make adjustments to the policy path as appropriate."
ENERGY PRICE WOES
Surging energy prices are a notable challenge for the Fed at the current time. The U.S. central bank lowered interest rates by three quarters of a percentage point last year as it sought to provide support to a softening job market amid still-high price pressures.
The war is increasing the risk that inflation will rise even higher, while creating fresh troubles for the job market and overall economic growth. As a result, there are difficult trade-offs for the Fed, which is mandated by Congress to contain inflation and promote maximum sustainable job growth.
The central bank traditionally looks through energy price increases, as they tend to impact overall price pressures on a temporary basis and bleed into underlying prices in a limited fashion. St. Louis Fed President Alberto Musalem, however, said on Wednesday that the current long stretch of above-target inflation creates a greater risk that energy inflation could become a longer-lasting economic problem.
Capital Economics said in a note the "indirect" impact of higher energy prices on inflation, separate from broader wage and price increases, could range from seven-tenths of a percentage point in the U.S. to nearly 1.5 points in the euro zone, with the UK and Japan somewhere in between.
The Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, was up 2.8% in January, and by an even more challenging 3.1% when stripped of food and energy costs.
Inflation fears have driven speculation in markets that higher rates might be needed to counter rising inflation. The Fed left its benchmark overnight interest rate in the 3.50%-3.75% range at a meeting last month and released projections showing policymakers expected one rate cut in 2026.
The war has "increased our level of uncertainty about the economy and the outlook, it's made our jobs more complex because it's increasing risks on both sides of our mandate," Logan said.
If it is resolved quickly, the economic impact will likely be "moderate," she said. A longer war, however, would likely have more "adverse" impacts that "could be moving in opposite directions with respect to our dual mandate, and cause a lot of tension between our responsibilities," Logan added.
(Reporting by Michael S. Derby; Editing by Paul Simao)
