Former Federal Reserve President James Bullard talked about the latest monetary policy decisions. He suggested that the Fed might cut interest rates several times before the year ends. He believes a decrease of 75 basis points by then could have a strong impact. Bullard pointed out that the neutral interest rate is low, around 3.25%. He prefers not to see a 50 basis point cut this week. For those who hold softer views, he mentioned that a 25 basis point cut this week, followed by another in October, would still be quite helpful. Bullard, known for his strong opinions, is a candidate for the Fed Chair position when Jerome Powell’s term ends in May 2026.

Federal Reserve’s Recent Rate Cut

This week, the Federal Reserve cut rates by 25 basis points, marking a clear shift in their approach. This move suggests a planned series of smaller rate reductions leading into the end of the year. We can expect measured cuts instead of drastic ones. The market has already adjusted to this change, anticipating a total decrease of 75 basis points by the end of 2025. This means we can likely expect two more quarter-point cuts in the upcoming meetings. This expectation grew stronger after the latest non-farm payrolls report showed job growth cooling to 155,000, making a stronger case for the Fed to support the economy. By opting not to make a larger 50 basis point cut, policymakers demonstrated that they are not panicking. The August CPI inflation report held steady at 2.8%, reinforcing a gradual approach to prevent reigniting inflation. This careful strategy reminds us of the adjustments the Fed made in 2019 to support economic growth.

Impact on Derivatives Traders

For derivatives traders, this decision reduces near-term uncertainty and helps keep volatility in check. Since the direction for short-term rates appears clear, implied volatility, as shown by the VIX, has decreased to around 14. This situation indicates that selling front-month options could be a good strategy in the next few weeks. Looking ahead, the common belief that the neutral rate is around 3.25% means this easing cycle could continue into 2026. The beginning of the yield curve seems well-managed by the Fed’s guidance. Therefore, trades that gain from a steeper yield curve could be advantageous as the market anticipates a smooth landing. Create your live VT Markets account and start trading now.

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