Federal Reserve Bank of Chicago President Austan Goolsbee spoke during a Q&A session at the mHub Industry Disruptor Series in Chicago. He highlighted growing concerns about the labor market and the possibility of rising inflation. Goolsbee stated that we should take a cautious approach. He pointed out that interest rates are a better measure of labor market health than simply looking at job growth numbers.

Impact of Tariffs on Prices

Goolsbee noted that tariffs affect prices differently across various sectors. While the market predicts a rate cut by the Federal Reserve in September, his remarks suggest a more careful outlook. Given the cautious tone from the Chicago Fed President, we should rethink the market’s strong belief in a September rate cut. As of the morning of September 4, 2025, the CME FedWatch Tool shows a nearly 70% chance of a cut at the meeting on September 18. This difference between official comments and market expectations gives traders a potential opportunity. Worries about inflation rising again are valid. The latest Consumer Price Index (CPI) report from July 2025 showed core inflation slightly increasing to 3.1% year-over-year, breaking the steady decline we had seen for months. If next week’s August CPI data shows a similar trend, the Federal Reserve will likely keep rates unchanged. It’s also important to focus on the overall health of the labor market, not just raw job numbers. The August jobs report revealed 195,000 jobs added, but the unemployment rate rose to 4.2% for the second month in a row. This slight decline supports the idea that the Fed may pause to assess if the situation is worsening.

Market Strategies

In light of this, we should consider buying volatility ahead of the Federal Open Market Committee (FOMC) meeting. Purchasing options, like at-the-money straddles on the SPY or QQQ ETFs, could benefit from significant market changes if the Fed surprises us. The VIX index, currently around a low of 14, seems undervalued given the uncertainty expressed by policymakers. We should also think about positions that go against a rate cut. This could include options on SOFR futures or shorting 2-Year Treasury note futures, as these are most affected by the Fed’s near-term decisions. If the Fed keeps rates steady, these positions could quickly become profitable as the market adjusts its expectations. We need to remember the policy mistakes of 2022 when the Fed was criticized for not acting quickly enough on inflation. This experience has likely made the current committee more hesitant to lower rates without solid justification, especially if inflation shows signs of rising again. Thus, the chance of a hawkish surprise this month appears higher than what the market is indicating. Create your live VT Markets account and start trading now.

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