Jay Powell noted a surprising rise in consumer strength this week. He mentioned that the main concern regarding current decisions is the labor market, but he sees no immediate job security issues. Powell indicated that if strong employment reports continue, a rate cut in December may not happen. He stated that households and banks are stable, and there are no major financial vulnerabilities.

Inflation Surveys Stay Strong

Inflation surveys were labeled as “rock solid.” Given the unexpected consumer strength, we need to rethink the chances of a December rate cut. The attention on labor market risks, without urgent alarm, indicates the policy will depend on future data. If strength continues, any easing expectations could be pushed to 2026. Consider the latest jobs report from early September, which showed the U.S. economy added 210,000 jobs in August 2025, keeping the unemployment rate low at 3.7%. This strong data suggests that the labor market does not need immediate rate cuts. This situation is similar to late 2023, when the market incorrectly anticipated aggressive easing that never happened. For interest rate traders, this means the flattening of the yield curve may pause. It might be wise to reconsider bets on a near-term policy change and instead look at options on Fed Funds futures that will benefit if rates stay the same through December. The market currently sees about a 40% chance of a cut by year-end, which now seems overly optimistic.

Equity Derivatives And Market Outlook

The claim that inflation surveys are “rock solid” matches the August 2025 CPI data, which showed core inflation at 3.8% year-over-year. This persistent level, well above the 2% target, leaves little room for monetary easing. Therefore, trades that benefit from ongoing inflation, such as inflation swaps, could be worthwhile. In the realm of equity derivatives, this climate suggests limits on market gains and increased downside risk if the market must adjust its rate expectations. We might see rising volatility, with the VIX, which has been around 15, likely to increase. Protective put strategies on major indices like the S&P 500 may become more appealing in the upcoming weeks. With households and banks in good shape, a severe economic downturn seems less likely, but a “higher for longer” rate environment is now the assumption. This should support the U.S. dollar, especially as other central banks like the ECB are signaling a more dovish approach. We could see the U.S. Dollar Index (DXY), currently near 106.50, test its earlier highs from this year. Create your live VT Markets account and start trading now.

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