Nomura has changed its forecast for US Federal Reserve interest rate cuts, now expecting reductions in both October and December this year. Originally, they only expected one cut in December. This change matches what many in the market believe. For next year, Nomura also predicts further cuts of 25 basis points in March, June, and September.

Risk Management and Labor Market Impact

Federal Reserve Chair Powell explained that a recent rate decision was made to manage risks. He said this choice was mainly due to concerns in the labor market. While inflation risks have lessened, they haven’t been completely resolved. Currently, the market anticipates about 44 basis points in rate cuts by the year’s end. With the Federal Reserve likely to cut rates in both October and December, we can see a clearer direction for monetary policy for the rest of the year. This shift follows yesterday’s “risk management” decision and matches market expectations, which point to a strong chance of another cut next month. The CME FedWatch Tool now shows over an 85% likelihood of a 25-basis-point cut during the October meeting. This cautious approach is a direct result of rising concerns in the labor market. The latest jobs report for August 2025 showed only 110,000 new jobs and an unemployment rate that rose to 4.2%. These figures support the Fed’s worries and indicate that planning for lower rates is the primary focus.

Inflation Worries and Derivatives Strategy

However, the Fed remains careful because inflation is still an issue. The most recent Consumer Price Index for August 2025 was at 2.8%, which is an improvement but still above the 2% target. This suggests that while we can expect rate cuts, any unexpected inflation data might shift the Fed’s strategy and cause market fluctuations. For derivatives traders, this situation is favorable for positioning around falling short-term interest rates. We should look at purchasing December 2025 and March 2026 SOFR futures contracts to benefit from anticipated policy easing. Options strategies, like buying call spreads on these futures, could also be a low-risk way to profit from the expected cuts. This policy outlook also benefits the stock market, which often performs well when borrowing costs drop. Increased interest in call options on major indices like the S&P 500 is expected as traders anticipate a continued rally through the year-end. This situation recalls the “mid-cycle adjustment” seen in 2019, which extended the bull market. A weaker dollar is another likely result of ongoing Fed rate cuts. Derivative traders may build positions betting against the US dollar, especially compared to currencies where central banks are more hawkish. We might see this reflected in the options markets with a rise in demand for euro and yen calls against the dollar. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now