UBS predicts that price pressures will continue through this year and into 2026. They expect the Federal Reserve to start easing its policy soon. With inflation likely to remain under control amid a slowing US economy, UBS thinks the Fed may lower interest rates in September. Their main outlook includes a total of 100 basis points in rate cuts during this easing period.

Putting Economic Support First

Even with ongoing price pressures, UBS believes that slower economic growth and lower core inflation could let the Fed focus more on supporting the economy. This means they might avoid keeping interest rates high for too long. We expect price pressures to persist, but a slowing US economy suggests the Federal Reserve will soon change its approach. The job growth report for July 2025, which showed an increase of only 155,000 jobs, supports this idea. This economic slowdown should give the Fed enough reason to start cutting rates as early as September. The market is already anticipating a September rate cut. According to the CME FedWatch Tool, there’s now over a 70% chance of a 25 basis point reduction next month. We think traders preparing for a quicker easing cycle, possibly through options on SOFR futures, could benefit if the Fed hints at more cuts.

Effects on Stocks and Market Volatility

This expected shift in policy is usually good for stocks because lower rates boost the current value of future corporate earnings. Interest in call options on the S&P 500 and Nasdaq 100 with expirations in October and December 2025 is increasing. This strategy is similar to what we saw in late 2023 when speculation about a Fed pivot led to a significant market rise. A gradual easing cycle, rather than a sudden reaction to a crisis, usually reduces market volatility. The VIX index, which is around 16 right now, could drop further if the Fed manages to stabilize the economy. Traders might look into strategies that profit from this, like selling out-of-the-money call options on the VIX. We also expect that a full 100 basis point easing cycle may decrease the attractiveness of the US dollar. The dollar index (DXY) has already fallen by almost 2% over the past month in response to these anticipated changes. We may see traders using options to take bearish positions on the dollar against currencies that are following a different policy direction. Create your live VT Markets account and start trading now.

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