Dallas Federal Reserve President Lorie Logan on Wednesday warned of consequences of a prolonged blockade of the Strait of Hormuz and also delved into slower moving forces beyond the trade, financial and fiscal imbalances that can push the global economy out of balance and create strains.
The Fed official, who is also a member of the Federal Open Market Committee (FOMC) — the rate-setting committee of the central bank —, delivered these remarks at the Bank of Japan Institute for Monetary and Economic Studies Conference in Tokyo.
US Energy Sector Faces Constraint in Offsetting Hormuz Shock
While inventory drawdowns and increased exports from the U.S. have filled much of the 13 million barrels per day (mb/d) shortfall stemming from the Hormuz closure, the U.S. oil production may not suffice to plug the gap in supply, said Logan.
Citing responses from U.S. energy executives to a recent Dallas Fed survey, the Fed official said the response to the shortage will be constrained due to
- Capital discipline exercised by producers
- Labor and other input shortage
- Limited pipeline capacity to move more gas out of the fields in Texas
“Fixed export capacity also means that in the near term, U.S. natural gas cannot fill much of the gap in global gas supplies from the closure of the strait.” Logan said.
She also warned that if shipping through Hormuz does not soon return to prewar levels, world oil and natural gas consumption should fall meaningfully than it has so far. “The economic consequences would depend on the degree to which end users can switch to other energy sources or use energy more efficiently, versus curtailing economic activity.”
Logan expressed confidence that the energy markets will come into rough balance before long.
Risks in Treasury Market Structure
The Dallas Fed president said public policies and industry practices must adapt to maintain the Treasury market’s strength when new imbalances emerge. She warned of the risks posed by the growing share treasury acquisition by levered investors such as hedge funds. “Levered positions can unwind rapidly in the event of price or funding shocks,” she said. Logan underlined the need for ongoing effort and vigilance for ensuring the resilience of the treasury market.
The Fed staffer mentioned the global decrease in fertility as one of the slower-moving forces that can create economic strains. She noted that the world’s fertility rate has fallen to 2.25 lifetime live births per woman in 2024 from five in the 1950s, with the total fertility below replacement rate in Asia, the Americas and Europe.
Lower fertility might reduce not just the growth rate of aggregate output, but also the growth rate of output per capita, Logan said, adding that “While forecasts are uncertain, reduced population growth appears very likely to shape the global economic trajectory in coming decades.”
She, however, said near-zero job growth and lower aggregate GDP growth will not be the bad signs they once were. As such, shifts in growth rates and fiscal positions could also affect the neutral interest rate, she added.
