Stephen Miran from the Federal Reserve discussed the expected drop in PCE shelter inflation. He mentioned that tariffs are not causing higher inflation for goods. Currently, the underlying inflation rate is close to 2%. If shelter inflation stays the same, it may influence the overall inflation outlook. Miran pointed out that prices are stable, indicating that monetary policy should reflect this stability. He is against selling mortgage-backed securities due to potential losses for the Fed. Instead, he supports maintaining an all-Treasury balance sheet unless a housing crisis occurs.

Market-Based Core Ex Shelter Inflation

Currently, market-based core ex shelter inflation is below 2.3%. Miran suggested that quicker interest rate cuts could help reach a neutral stance. He believes that the Fed’s prior actions in the housing market have worsened affordability issues. In currency news, the US Dollar showed mixed results against major currencies, performing best against the New Zealand Dollar. Ongoing currency analysis shows fluctuations driven by economic factors, such as expectations for Fed policies and GDP growth projections. Analysis of various financial markets highlights expected movements and strategic insights without bias or recommendation. Comments from December 15, 2025, indicate that a significant Federal Reserve official is pushing for faster interest rate cuts. He believes the inflation challenges faced in 2023 and 2024 are mostly behind us, with core inflation now near the 2% goal. This suggests that a dovish policy could quicken in the weeks ahead.

Impact on Interest Rate Derivatives and US Dollar

For traders in interest rate derivatives, this serves as a clear indication to prepare for lower short-term rates. With the Fed funds rate at 4.00-4.25%, futures contracts related to SOFR may experience more buying pressure. The 2-year Treasury yield is already at 3.50%, but these comments suggest traders might push it lower, anticipating a more aggressive cutting cycle. In the foreign exchange markets, this prediction may continue to impact the US Dollar negatively. A quicker rate cut cycle reduces the dollar’s yield advantage against currencies like the Euro and the Pound Sterling. We might see options traders favor buying calls for pairs like EUR/USD, which is testing 1.1750, and GBP/USD, approaching 1.3400. This scenario is generally favorable for equity index derivatives. Lower borrowing costs and a calming economic outlook boost stock valuations, explaining why the S&P 500 has been rising lately. Traders might consider buying call options or futures on major indices, as a dovish Fed typically supports market rallies. However, the main risk here is the shelter component of inflation. The latest Personal Consumption Expenditures (PCE) data from November 2025 showed shelter inflation stubbornly high at 4.1% year-over-year. If this figure doesn’t decline as expected, the case for faster cuts becomes weaker, posing a potential trap for overly aggressive positions. This uncertainty suggests that volatility may increase around upcoming inflation data releases. Options strategies that benefit from sudden price changes, like straddles on currency pairs or equity indices, could be advantageous. The market is banking on falling shelter costs, and any contradictory data could lead to significant price adjustments. Create your live VT Markets account and start trading now.

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