On Tuesday, the President of the Fed Bank of Boston mentioned that the Fed expects ongoing effects from previous tariffs. This aligns with the US Consumer Price Index (CPI) inflation data, which showed rising price pressures as critics of the tariffs had predicted. The Fed is struggling to set monetary policy due to the uncertainty, even though the economy is strong enough for interest rate decisions. They suggest adopting an “actively patient” approach to monetary policy.

Tariff Impact On Inflation

Tariffs are likely to raise inflation in the second half of 2025, with core inflation expected to be around 3% by the year’s end. Although tariffs might inhibit hiring, healthy business and household finances may lessen the effects. Profit margins may limit how much of the tariff costs are passed on to consumers. While tariffs may have a short-term impact, the economy remains broadly resilient. We are starting to see some effects of tariffs on core goods inflation. Given the uncertainty mentioned by the Boston Fed President, we think the market is not fully accounting for future volatility. The CBOE Volatility Index (VIX) is currently trading at relatively low levels around 13. Therefore, buying call options on the index could be a smart way to protect ourselves from market fluctuations caused by policy changes. This strategy could allow us to benefit from the likely disruptions that new tariff announcements might cause.

Market Volatility And Investment Strategies

The forecast for core inflation nearing 3% indicates a gap from the current market expectations for interest rate cuts. While the latest CPI report from May showed a slight annual decrease to 3.3%, concerns about tariffs from officials suggest the Federal Reserve might keep rates higher for longer than expected. As a result, we should consider investing in SOFR (Secured Overnight Financing Rate) futures that go against the multiple rate cuts the market seems to be pricing in for the rest of the year. Looking back to the 2018-2019 trade disputes can guide us on market volatility. During that time, increases in tariffs led to sharp market reactions, with the VIX rising more than 40% in May 2019 alone. This historical context supports the idea that buying volatility is a smart approach in today’s uncertain monetary policy environment. The article points out that strong profit margins could absorb some costs, meaning the economic impact will vary across sectors. This suggests we should focus on targeted derivative strategies rather than broad market shorts. We might use options to take a bearish position on tariff-sensitive consumer sectors like retail or automotive while remaining neutral on sectors with more robust financial health that can handle price changes better. Create your live VT Markets account and start trading now.

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