Philadelphia Federal Reserve President Anna Paulson noted that the job market is “bending not breaking.” She believes the labor market is a better indicator of economic health than GDP data. Potential asset sales could help boost growth but might limit job creation. Tariff adjustments could be finalized in the next six months, and overall, the economic outlook seems positive. Paulson anticipates that inflation will decrease, the job market will stabilize, and GDP will hover around 2%.

Labor Market Risks

Labor market risks are still high, but the Federal Reserve is focused on reducing inflation. The current job market supports the Fed’s easing strategy. Tariffs are keeping inflation above target levels, but it is expected to normalize within a year. The US Dollar Index (DXY) is showing slight gains near 98.50, with the dollar performing strongest against the Australian Dollar today. The heat map illustrates percentage changes among major currencies, with the left column as the base and the top row as the quote. We are being informed that the job market is slowing down without plummeting into a recession. The December 2025 jobs report supports the “bending, not breaking” perspective, indicating a payroll gain of 155,000 and an increase in the unemployment rate to 4.0%. This suggests the Federal Reserve can continue making policy adjustments without worrying too much about the labor market. Inflation is clearly easing, with the most recent Core PCE reading for November 2025 at 2.8%, significantly lower than its peaks in 2024. This trend allowed the Fed to cut interest rates three times in the latter half of last year. It’s expected that inflation will stabilize as tariff-related price pressures decline over the next two quarters.

Lower Interest Rates

Given this environment, it’s wise to prepare for lower interest rates in the upcoming months. Strategies involving Secured Overnight Financing Rate (SOFR) futures that capitalize on a continued easing cycle could be beneficial. We should watch for chances to anticipate further, cautious rate cuts by the Federal Reserve this year. The generally positive economic outlook suggests lower market volatility, which was evident as the VIX index fell in late 2025. This creates a good environment for strategies such as selling options to earn premiums, like selling puts on stock indices. This approach profits from a stable market and the gradual decrease in volatility. Although the US Dollar Index is steady near 98.50, the policy of cutting rates typically weakens a currency. We might see the dollar soften against currencies where central banks are less likely to ease. Positioning for a weaker dollar against the Euro or Swiss Franc could be a significant focus in the first half of the year. This situation feels reminiscent of the soft landing achieved in the mid-1990s when the Fed managed to cool the economy without triggering a major downturn. During that time, stock markets performed well after the shift toward easing. Traders should be ready for a similar scenario if the current outlook continues and labor market risks remain controlled. Create your live VT Markets account and start trading now.

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