Lorie Logan, President of the Federal Reserve Bank of Dallas, said balance sheet decisions should not distract the Fed from its main mission. She said balance sheet growth is not harmful if it meets the public’s needs, and policy should be guided by what is best for the economy.
She said it costs the Fed little to meet demand for bank reserves. She said lowering reserve demand is better than returning to a scarce reserves system, and a smaller balance sheet could come from either lower reserve demand or a scarce reserves approach.
Ample Reserves And Financial Stability
Logan said the current ample reserves system is “efficient and effective”. She said pushing banks to use fewer reserves would raise financial system risk, and broader access to Fed liquidity tools could also reduce reserve demand.
She said some ways to cut reserve demand would need action outside the Fed, including possible regulatory changes. She said she supported the Fed holding policy steady at the recent FOMC meeting.
Logan said the labour market stabilised in the second half of 2025 into this year, but payroll gains have been “pretty weak”. She said immigration has moved the job market breakeven to close to zero.
She said she was not convinced inflation was easing enough even before the Iran war started. She said the war has raised uncertainty and risks on both sides of the Fed’s mandate.
Market And Trading Implications
She said business investment is strong and consumers have been resilient. She said forecasts were hard to produce, a swift war resolution could mean a moderate impact, and policy is set to respond to data.
She said the US has buffers against war effects. She said a key question is whether disruptions lead to more US energy investment, and producers may need extended higher prices to raise output.
The conflicting signals from the Federal Reserve are creating a challenging environment for traders. We are hearing that payroll gains have been “uncomfortably weak,” which was reinforced by the recent March report showing a gain of only 85,000 jobs. This suggests the labor market, which we saw stabilize in the second half of 2025, is now a primary concern.
Despite the slowing job market, there was concern about inflation even before the war in Iran began. The conflict has added significant uncertainty, with Brent crude futures now trading above $105 a barrel, up over 20% since the start of the year. This complicates the Fed’s mission, creating risks for both inflation and employment.
Given this level of uncertainty, we should expect market volatility to remain high in the coming weeks. The CBOE Volatility Index (VIX) has been stubbornly elevated, holding above 24 for the past month, a sharp contrast to the average of 17 we saw in 2025. This environment suggests that buying options to protect positions, rather than taking large outright directional bets on indices, could be a prudent strategy.
For interest rate traders, this points towards a Fed that is firmly on hold for now. Fed funds futures are pricing in over a 90% chance of no change at the next meeting, reflecting the view that policy is positioned to respond to new data. However, options on SOFR futures show increased demand for contracts that would profit from a rate cut later in the third quarter, signaling a bet that weak labor data will eventually force the Fed’s hand.
The comments on energy are particularly notable for commodity traders. We are not hearing about a dramatic increase in U.S. production, a sentiment supported by recent Baker Hughes data showing the oil rig count has remained flat over the last two months. This suggests that sustained high prices are needed to incentivize new investment, making long positions in oil derivatives attractive.
