The Federal Reserve’s Goolsbee suggests that new tariffs on parts and copper, along with revisiting tariffs on Europe and Canada, may not be helpful. It is important to understand how these tariffs will affect inflation for future economic planning. Goolsbee points out that ongoing tariff announcements make it hard to gauge their impact on prices, which disrupts inflation tracking. This uncertainty could push back the timeline for lowering interest rates if inflation stays at 22%.

Monitoring Inflation Trends

Keeping an eye on inflation trends is crucial, and we may need to look at several months of data. If the tariff uncertainties clear up, there’s a chance that interest rates could go down. The ongoing uncertainty around tariffs clouds our ability to forecast inflation trends. This confusion could delay any potential interest rate cuts from the Federal Reserve. Derivative traders should brace for increased volatility as markets respond to each news update. The new tariffs on Chinese goods—including a 100% tax on electric vehicles and additional hikes on steel and solar parts—are examples of the confusing announcements mentioned earlier. This approach makes it harder to set prices and will likely cause sector-specific issues. We see investment opportunities in options on industrial and commodity ETFs that will feel the impact of these trade policies. Even though the latest Consumer Price Index report for April showed a slight drop to 3.4%, this single statistic isn’t enough to build confidence. We agree that several more months of good data are needed before the central bank will feel secure. This likely means the market will stay in a “wait and see” phase throughout the summer.

Market Pricing and Volatility

This delay is now evident in market pricing. The CME FedWatch tool shows there’s about a 50% chance of a rate cut in September, a significant change from early-year predictions. As a result, trading strategies based on a clear interest rate trend are challenging to devise at this moment. With the CBOE Volatility Index (VIX) hovering around a low 12-15 range, we believe volatility is undervalued given current conditions. Historical data from the 2018 tariff escalations showed similar uncertainty leading to rocky markets. We see this as a good opportunity to buy longer-dated options at low premiums for a potential larger market movement. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now