Mary Daly, President of the Federal Reserve Bank of San Francisco, indicated that two rate cuts by the Federal Open Market Committee (FOMC) could be appropriate for 2025. She was pleased with the Fed’s decision in July but felt unsure about making similar decisions repeatedly. Daly noted that two rate cuts this year could help adjust financial policies, but fewer cuts might also be sufficient. She emphasized that policy changes remain an option with each meeting. While she is prepared to delay decisions if needed, she acknowledged that such delays can’t go on forever.

Economic Uncertainty

There’s uncertainty about whether a rate cut in September is essential, especially as the job market shows some weakening. Daly pointed out that current tariff issues do not impact inflation and highlighted the need to take action based on fresh data. Overall, Daly seems more inclined to support rate cuts soon due to the economic uncertainties. Recent comments suggest a strong chance of two interest rate cuts in 2025, with the first possibly happening in September. This shift in tone comes in response to a softening job market. The July 2025 jobs report showed nonfarm payrolls increasing by only 175,000, marking the third month of slowing growth. This weak labor data provides the Federal Reserve with a reason to adjust its policy.

Interest Rate Cuts

The way for these cuts is made easier by positive inflation trends, which are now improving. The latest core Consumer Price Index for July dropped to 2.8%, its lowest since early 2023. This gives policymakers the confidence to act without worrying about rising prices. It also suggests that any tariff impacts are not long-lasting, removing a major hurdle to easier monetary policy. Traders are reacting by pricing in these rate cuts, with the CME FedWatch Tool now indicating over an 80% chance of a 25-basis-point cut at the September meeting. This sentiment is visible in the bond market, where the 2-year Treasury yield, sensitive to Federal Reserve policy, fell below 4.10% last week. Derivative traders might want to position themselves for falling yields through instruments like SOFR futures. For equity derivative traders, this situation supports strategies that benefit from higher stock prices. Lower borrowing costs can significantly boost corporate earnings. We are looking at bullish strategies, such as buying call options or selling put spreads on indices like the S&P 500, especially if markets weaken before the meeting. The goal is to take advantage of potential gains from a more flexible policy stance. With each upcoming meeting described as ‘live,’ we can expect increased market volatility around the FOMC announcements. Traders should prepare for sharp market movements and may consider buying VIX options as a hedge or as a direct bet on expected uncertainty. The need for decisive action means the September decision holds greater importance than it did just a few months ago. Create your live VT Markets account and start trading now.

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