Federal Reserve Bank of Dallas President Lorie Logan is worried about inflation that continues to rise. Even though the job market is getting weaker, she thinks that some policy actions might accidentally cause inflation to go up. Logan pointed out that tariffs are contributing to inflation and highlighted her concerns about ongoing inflation in services outside of housing. She also mentioned the risks of both rising and falling inflation expectations due to these tariffs.

Stimulating Demand in a Balanced Job Market

Boosting demand in a balanced job market could lead to higher prices without necessarily improving job availability. Logan emphasized the importance of being careful about cutting rates further, as the current monetary policy is only somewhat restrictive. She noted that the Federal Reserve is still far from meeting its inflation targets, which requires careful planning. Balancing inflation concerns with risks in the job market is tricky. The Federal Reserve is advising caution about expecting more rate cuts, even as the economy slows. The market seems to expect more easing, but Logan’s comments indicate that betting on lower short-term rates is now riskier. We should rethink any positions relying heavily on the Fed cutting rates before 2025 ends. The persistent inflation in non-housing services is a serious red flag. The most recent CPI data from September 2025 showed this area stubbornly high at 4.5%, signaling that underlying price pressures are not easing quickly. This resistant inflation is the main reason the Fed is hesitant to declare success and move to rate cuts.

Level of Uncertainty and Market Implications

The uncertainty from a key Federal Reserve official suggests we may see more market volatility soon. Mentioning both positive and negative risks means there is a wider range of possible outcomes for interest rates and the economy. Derivative traders might look into strategies that capitalize on this, such as buying VIX calls or using straddles on major indices. We need to balance the weak job market data with ongoing inflation concerns. The September jobs report revealed a gain of only 95,000 jobs, highlighting a slowdown, but the Fed insists that inflation is the area where they are “furthest away” from their goal. This means they may tolerate more job market weakness before feeling comfortable enough to cut rates. Looking back at the aggressive rate hikes in 2022 and 2023, we thought they would be strongly restrictive, but now it seems the policy is only “modestly restrictive.” This indicates that the neutral interest rate might be higher than we previously believed. Therefore, we should brace ourselves for interest rates to stay high for a longer time, supporting the U.S. dollar and creating challenges for stock markets. Create your live VT Markets account and start trading now.

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