The economy is currently stable, with GDP and private domestic final purchases meeting expectations. While consumer spending has been strong, it is now slowing to more sustainable levels. However, the housing market is still struggling, and understanding GDP is complicated due to changes in net exports. Inflation is above the 2% target, with year-over-year increases in PCE and core PCE projected at 2.5% and 2.7%, respectively. Inflation pressures are apparent even without considering tariffs, though tariffs are starting to affect consumer prices. They could cause a one-time price spike, but there’s uncertainty around this. We face inflation risks related to both rising prices and unemployment.

Economic and Labour Market Overview

Unemployment is low, and job market indicators suggest we’re close to maximum employment, though job creation has slowed—especially in the private sector. There are signs of potential issues in the labor market, particularly concerning the unemployment rate. Powell described current policy as moderately restrictive, ready to adapt as new data comes in. No policy changes are expected in September until employment and inflation reports are reviewed. Tariffs have added uncertainty, impacting consumer goods prices, and trade talks are ongoing with unclear effects on costs for consumers and retailers. Governance remains focused on explaining dissent clearly and relies on government data for decision-making. Following the Fed’s choice not to cut rates, derivative traders should prepare for more uncertainty. The market had anticipated a high chance of a rate cut in September, but this probability has now dropped below 50%, indicating a significant change in outlook. This shift suggests that instruments betting on lower rates, like SOFR futures, may encounter challenges in the coming weeks. We need to pay close attention to the next two employment and inflation reports before the September meeting. This data-driven approach likely means volatility will increase around the release of the Non-Farm Payrolls report in early August and the Consumer Price Index (CPI) data mid-month. Options strategies that benefit from price fluctuations, such as straddles on equity indices or bond ETFs, might prove useful.

Inflation and Fed Strategy

The ongoing inflation is the main reason for the Fed’s decision to pause. Recent data from June 2025 indicated that Core PCE, the Fed’s favorite metric, remained steady at 2.8% year-over-year, significantly above the 2% target. This justifies the Fed’s cautious outlook and means that any unexpected increase in inflation from upcoming reports will make a September rate cut less likely. We should closely examine the details of the labor market data. The last jobs report from June 2025 revealed that overall job growth was largely driven by government hiring, which hid weaknesses in the private sector. If the upcoming report shows that private payrolls keep slowing, it could reveal a vulnerability that prompts the Fed to consider easing. This situation is likely to keep short-term Treasury yields high, as the likelihood of a rate cut soon has diminished. This poses challenges for growth-focused stocks, especially in the tech sector, which are sensitive to rising interest rates. The VIX, a measure of market volatility, has increased from recent lows below 13 to over 15, reflecting growing investor concerns. The unpredictable impact of tariffs adds another layer of risk; Powell acknowledged that tariffs are a wild card for inflation. While we might expect a one-time price jump, evidence of tariffs causing persistent inflation would strengthen the Fed’s cautious approach. This uncertainty makes long-term bets risky. Create your live VT Markets account and start trading now.

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