Demand for labor is falling faster than supply, mainly due to immigration changes. Employment patterns are largely influenced by immigration policies. Current policies still require a cautious approach, and previous patience is seen as necessary. There is no strong backing for a 50 basis point change today, indicating a shift towards a neutral stance.

Market Response

The market reacted negatively to mixed signals, causing the S&P 500 to drop 34 points, or 0.5%. The risk of inflation has slightly decreased since April, while the labor market faces potential downturns. A meeting-by-meeting strategy is being used, focusing on data analysis. Predictions vary, with ten members expecting two more rate cuts this year, while nine anticipate fewer cuts. Powell did not comment on a specific court case. Adjustments to non-farm payrolls met expectations, but Powell disagrees with current market valuations. Tariffs mainly impact intermediary companies, which plan to pass these costs onto consumers. Powell offered no updates on his possible exit in May. Today’s message is one of uncertainty, which fuels market volatility. The Fed is managing risks rather than following a clear direction, making the environment challenging. The VIX rose above 18, indicating that traders might want to buy protection or sell high premiums on short-term options.

Disconnection Between The Fed And Market Expectations

There’s a gap between the Fed’s cautious stance and market expectations. Fed funds futures suggest a nearly 70% chance of another rate cut by November, even as Powell does not support this idea. Upcoming data releases will likely trigger strong market reactions, particularly regarding inflation and job numbers. The focus on “downside risks” in the labor market is crucial. The August jobs report showed only +150,000 new jobs, with the unemployment rate rising to 4.1%. Any further weakness could push the Fed to adopt a more accommodating stance. This makes long-term options that predict lower rates appealing, as they could change quickly if the labor market worsens. At the same time, we can’t overlook that policy remains “restrictive” because inflation is not fully under control. August’s Consumer Price Index revealed core inflation at 3.4%, well above the 2% target. This persistent inflation is why the Fed is hesitant, creating risks for traders. The current situation resembles the mid-cycle adjustments seen in 2019. Back then, the Fed made several “risk-management” cuts without indicating a major easing cycle. That period led to erratic, range-bound trading, suggesting that strategies benefiting from sideways movements, like iron condors on the S&P 500, could do well in the coming weeks. Create your live VT Markets account and start trading now.

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