How a camping analogy explains the Fed's delicate moment

A new monetary policy metaphor from Dallas Fed president Lorie Logan helps explain where things stand for the central bank — and the outlook for U.S. interest rates — heading into the end of the year.

Why it matters: The inflation fire has been mostly doused. The question now is how much more water — if any — the Fed needs to pour on the remaining embers to ensure no additional flare-up.

• In its policy meeting concluding Sept. 20, and two more that remain this year, the question on the table will be, in effect, how great that risk is.

What they're saying: Logan invoked her youth going on Girl Scout camping trips. "As every Scout knows," she said at Southern Methodist University, "when you put out your campfire, you must make sure it is 'cold out' — so completely extinguished that you feel no heat when you touch the ashes with your bare hands. Any warm embers could reignite later."

• But the Fed "cannot safely throw bucket after bucket of cold water on the economy just in case inflation catches fire again. If we did that, not only inflation but economic activity itself would soon be 'cold out' — which is not an outcome we want," she said.

State of play: In projections offered in June, 12 of 18 policymakers expected it to be appropriate to raise rates two or more times before the end of 2023. The central bank did one hike at the end of July, meaning it would take only one more rate hike for policy to align with that forecast.

• The signaling has been clear that the central bank will stand pat in its meeting two weeks from now, but a big open question will be what the newest round of projections signals.

• Two straight months of favorable inflation data could become three if the August Consumer Price Index due out Wednesday aligns with analysts' expectations, giving more policymakers comfort that their dousing job is done for good.

Yes, but: There remain simmering inflation risks that could make some policymakers reluctant to put away their buckets.

• Oil prices have risen 29% since late June. The Fed generally looks through energy price swings, but that surge could ripple into other costs (transportation, for example), and higher gasoline prices could raise businesses' and consumers' inflation expectations.
• There's reason to think medical services could contribute to higher inflation in core services excluding housing.

The bottom line: "You might say we need to drizzle water on the fire pit and watch closely for signs that the coals are heating up again," said Logan.