The Fed funds market shows a 10% chance of a 50 basis point rate cut. As the Fed enters its blackout period, many wonder how the timing of meetings impacts decision-making. Economic data released before each meeting can complicate predictions and market movements. The non-farm payrolls report, released just before the blackout, leaves investors uncertain about future rate decisions.

Effect of Upcoming CPI Report

There is growing speculation about how the upcoming CPI report will affect the Fed’s decisions. A 10% market expectation for a 50 basis point cut indicates possible instability, especially if the CPI report is soft or other economic indicators are weak before the FOMC meeting. This uncertainty goes against the Fed’s goal of maintaining stable markets. Now that the Fed is in its quiet period ahead of the mid-September meeting, we must interpret the data ourselves. The latest jobs report for August 2025 shows hiring slowing to 150,000, while the unemployment rate rose to 4.1%. This makes the upcoming Consumer Price Index (CPI) report crucial for the Fed’s next move. The 10% chance of a 50 basis point cut suggests that options to protect against a sharp economic downturn are relatively cheap. Traders should consider buying options that benefit from increased market volatility, such as VIX calls or out-of-the-money puts on equity indices. If the CPI reading surprises on the low side, like below a 3.0% annual rate, it could lead to rapid price changes and these positions could become very profitable.

Response in the Rates Market

In the rates market, traders can prepare for a surprise cut using futures contracts linked to the Secured Overnight Financing Rate (SOFR). We saw similar situations in 2023, where unexpected dovish moves resulted in strong rallies in Treasury bond prices. Traders might take a long position in 2-year Treasury note futures, which are very sensitive to short-term Fed policy changes. On the other hand, those expecting no cut or just a 25 basis point move should be careful. The risk is not balanced; a weak data point could create much bigger market shifts than one that meets expectations. To manage potential downsides until the Fed’s meeting wraps up, it makes sense to hedge long-equity portfolios by selling S&P 500 futures or buying puts. Create your live VT Markets account and start trading now.

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