The Federal Reserve has cut interest rates by 25 basis points after its recent meeting. One member, Miran, disagreed and wanted a larger cut of 50 basis points. Fed Chair Powell noted that there wasn’t a strong push for a bigger reduction. The latest projections show that ten members expect at least two more 25 basis point cuts this year, while nine believe there will only be one more. Miran prefers a 50 basis point cut at every meeting. He predicts rates will be at 2.875% by 2025. The median projections for 2026 and 2027 are 3.4% and 3.1%, respectively. Powell described the rate cut as a “risk management” step, as concerns about the labor market increase while inflation worries ease. He emphasized the Fed’s focus on data for future decisions.

Potential Rate Reductions

The Fed might lower rates again in October and December. Powell mentioned that current market expectations may not be fully realized, but they are still being considered. Markets are paying close attention to improvements in the labor market, especially with the upcoming non-farm payrolls report. If labor data remains weak, it could lead to more cuts, but improvements might change the outlook. Markets expect an additional cut of 44 basis points by the end of the year, leaning towards two cuts of 25 basis points each. The current dot plots do not show strong support for a more aggressive reduction plan. The next Federal Reserve meeting is on October 29, which will allow them to review new U.S. economic data. Market conditions appear stable, with no significant change in sentiment. With yesterday’s rate cut, it seems the Federal Reserve is starting a cautious easing cycle. While the 25 basis point cut was expected, the divided opinions in the dot plot indicate uncertainty about the pace of future cuts. This division suggests that upcoming economic data will heavily influence decisions. Attention is now primarily focused on the labor market, which Powell identified as a major risk. Concerns grew after the August 2025 Non-Farm Payrolls report showed a disappointing 155,000 new jobs, and recent JOLTS data revealed job openings dropped below 8.4 million for the first time since early 2021. The upcoming jobs report on October 3 will be crucial for setting expectations for the October meeting.

Market Reactions and Strategies

The shift towards labor risks is possible because inflation has remained stable, with the latest Core PCE inflation for July 2025 at 2.7%. This stability gives the Fed room to respond to a slowing economy without reigniting inflation. We believe this situation supports the proactive “risk management” strategy for rate cuts. For derivative traders, this data-driven environment is likely to increase volatility around important economic releases. Options strategies like straddles or strangles on short-term interest rate futures (SOFR) may work well for capitalizing on potential price movements after the October 3 payroll report. Implied volatility is expected to rise as the report date approaches. Currently, the market is pricing in about 44 basis points of further cuts by the end of the year, which aligns with the expectation of two additional 25 basis point reductions. Traders can express this view using December SOFR futures contracts. A weak jobs report would confirm this pricing, while a surprisingly strong report over 200,000 jobs could lead to quick adjustments and a shift in these dovish expectations. We have seen similar situations in the past, such as during the “mid-cycle adjustment” of 2019 when the Fed implemented a series of careful rate cuts. In that time, the market reacted to every economic data point, creating short-term trading opportunities. This historical pattern suggests that we shouldn’t expect a steady decrease in rates but rather a fluctuating, data-driven approach. Create your live VT Markets account and start trading now.

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