Conflicting Pressures

The bank highlights that the Fed is facing mixed pressures from high inflation and rising unemployment. They expect a slow easing cycle to reduce the risk of inflation caused by tariffs while handling political issues during an election year. NAB states that the uncertainty about interest rates is “wider than normal.” As of September 9, 2025, it’s likely that the Federal Reserve will announce its first 25 basis point rate cut this month. The August job report showed unemployment rising to 4.2%, indicating that risks in the labor market are growing. This shifts the focus toward preparing for lower short-term rates in the upcoming weeks. However, inflation is still a concern, with the last Consumer Price Index (CPI) reading at a high 3.6%. This conflict means more uncertainty for the Fed, presenting opportunities in volatility markets. It’s important to explore strategies that can take advantage of price swings, not just market direction, as we await the Fed’s decision amidst this mixed information. For interest rate traders, this means considering options on SOFR futures instead of holding direct futures. Additionally, buying calls or call spreads on Treasury futures could effectively position them for a dovish policy change. These trades provide potential gains if a rate cut happens while minimizing risks if the Fed hesitates due to stubborn inflation.

Equity Traders Strategy

Equity derivative traders should expect a possible market rally following a rate cut announcement, but they must also recognize the underlying economic weaknesses driving this action. We are using options on the S&P 500 to prepare, while also buying VIX calls as a safety measure. This combined approach protects against the chance that the market focuses more on a slowing economy rather than the lower borrowing costs. This situation is reminiscent of the “insurance cuts” the Fed implemented in 2019 to counter a slowing global economy. At that time, the market rallied after the policy shift. We anticipate a similar short-term reaction now, but the political factors of an election year add unpredictability. Looking ahead, there’s an expectation of a full easing cycle totaling 125 basis points through 2026. Therefore, traders should also consider longer-term derivatives that reflect this sequence of rate cuts. Options on futures set for mid-2026 could provide value, as they capture the expected decrease in the Fed funds rate over time. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now