FOREX: USD Tracking Oil Prices Higher, Risk-Off Weighs on Higher Beta FX

Dallas Fed President Logan (2026 FOMC voter, hawk) doesn't sound like she would support a rate cut in the coming months. While her base case is that inflation pressures will abate in 2026, she says in a speech Tuesday "I am not yet fully confident inflation is heading all the way back to 2 percent", and "the labor market now appears to be stabilizing, and the downside risks appear to have meaningfully dissipated" with December's unemployment rate consistent with full employment. We continue to presume that she doesn't support any rate cuts in 2026.

• The key passage on the policy outlook: "We will learn in coming months whether inflation is coming down to our target and whether the labor market will remain stable. If so, this would tell me that our current policy stance is appropriate and no further rate cuts are needed to achieve our dual mandate goals. If instead we see inflation coming down but with further material cooling in the labor market, cutting rates again could become appropriate. But right now, I am more worried about inflation remaining stubbornly high. Fortunately, our policy is well-positioned to respond to risks to either of the FOMC’s dual mandate objectives."
• She argues that the end-2025 rate cuts raised inflation risks: "with inflation still elevated, those cuts took on additional risk on the inflation side of our mandate". Among various such risks, "insights from Fed regional surveys and other contacts suggest tariffs still need to fully work their way through prices this year. We have yet to see any evidence of further easing in core non-housing services inflation, which generally moved sideways in 2025. And, as in recent years, headline inflation may surprise to the upside in January and February as firms’ annual price increases may be large due to rising costs and still solid demand." Additionally, "economic activity also faces several upside risks that could slow or stall progress toward restoring price stability."
• She reiterates her previously-stated concerns that rates may not be sufficiently restrictive, citing model-based estimates of neutral that "currently range between 1.08 and 2.09 percent", putting the current nominal fed funds rate of 3.64% "squarely within the range of neutral rate estimates" (after deducting 2% inflation). In fact, she says that when looking at TIPS / swap market proxies for the real neutral rate, "expectations for neutral real interest rates" are "at the upper end of the model-based estimates and not far from the current policy rate".
• As an ex-manager of the Fed's SOMA portfolio, her commentary is always watched for any clues on current Fed balance sheet thinking, but there is not much new in this speech. She says she supported the Fed's decision to start reserve management purchases and supports enhancements to improve the standing repo facility's effectiveness (particularly providing a centrally-cleared option). On future RMPs, she reminds that "reserve management purchases should not be viewed as mechanical", in line with the Fed's previous guidance that bill purchases could slow from the $40B/monthly pace once the April tax date is concluded.

• Treasury futures holding near highs (TUH6 104-11.88, +1.5, TYH6 +10 at 112-16) after the $58B 3Y note auction (91282CQA2) draw 3.518% high yield vs. 3.519% WI; 2.62x bid-to-cover vs. 2.65x prior.
• Peripheral stats: Indirect take-up rises to 57.15% vs. 56.50% prior; direct bidder take-up at 31.92 from 29.5% prior; primary dealer take-up retreats to 10.94% vs. 14.0% prior.
• The next 3Y auction is tentatively scheduled for March 10.

• US TSY 3Y NOTE AUCTION: HIGH YLD 3.518%; ALLOTMENT 45.28%
• US TSY 3Y NOTE AUCTION: DEALERS TAKE 10.94% OF COMPETITIVES
• US TSY 3Y NOTE AUCTION: DIRECTS TAKE 31.92% OF COMPETITIVES
• US TSY 3Y NOTE AUCTION: INDIRECTS TAKE 57.15% OF COMPETITIVES
• US TSY 3Y AUCTION: BID/CVR 2.62