Fed funds futures have returned to levels seen before the CPI report, easing after the US PPI data was released. This data reveals a gap in price pressures, with producers facing rising costs that have not yet affected consumer prices. This suggests that companies may eventually need to pass on these costs because of tariffs, which could impact them in future quarters. Therefore, the Fed should closely watch inflation trends.

Rate Cut Predictions

Trader expectations for a September rate cut have decreased, with the odds now around 93%, down from earlier predictions of a guaranteed cut. By the end of the year, about 57 basis points of cuts are expected, consistent with pre-CPI levels and lower than the 61 basis points forecasted after the inflation reports. There is still strong anticipation for a September rate cut, especially with the labor market showing signs of softening and tariff-driven inflation not yet showing in consumer prices. The Fed faces a tough decision: a cautious 25 basis point cut could help balance temporary inflation caused by tariffs with market needs. Policymakers agree that a 50 basis point cut isn’t supported by current data. Attention is now on Powell’s upcoming speech for direction, although it may not provide clear guidance for September. The US jobs report on September 5 will be crucial. The producer price data from yesterday complicates the situation, as it shows a disconnect with the milder consumer price report earlier this week. Producer costs are rising, but consumers aren’t feeling the effects yet, complicating the Fed’s inflation picture. As a result, we have lowered our expectations for aggressive rate cuts.

Market Volatility

The chances of a September rate cut have decreased from fully priced in to about 93%, according to Fed funds futures. This pattern is familiar; we noticed a similar delay in 2022, where producer price hikes led to higher-than-expected consumer inflation. Derivative traders may want to cut back on strategies that depend on a very dovish Fed, as the central bank may take a more measured approach. This uncertainty is also creating opportunities in the volatility market, as the VIX index has risen to nearly 16 from its recent lows. This suggests that options strategies, which can benefit from large price changes, may be wise. Hedging long portfolios with put options or using straddles around important data releases could help guard against unexpected hawkish moves from the Fed. All attention will be on Fed Chair Powell’s upcoming speech at Jackson Hole and, more importantly, the jobs report due on September 5. July’s jobs report showed a slight decline, with non-farm payrolls at 165,000. Another weak report would strengthen the argument for a rate cut. Until then, the market is likely to remain uncertain. In practical terms, positions betting on a 50 basis point cut in September are now very speculative and should be reconsidered. A more balanced approach—such as using interest rate options to bet on a single 25 basis point cut while hedging against the chance of no cut—makes more sense. It’s wise to wait for the next labor market data before making strong directional bets. Create your live VT Markets account and start trading now.

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