Christopher Waller, a member of the Federal Reserve Board, supports a 25 basis points cut in interest rates. He thinks that the current monetary policy is too strict and is limiting economic activity, even though the economy is growing well. The labor market still faces challenges, especially with weak demand and health. Inflation is high because of tariffs, but expectations remain stable, indicating that monetary policy might overlook the effects of these tariffs.

Policy Suggestion

Waller believes that last year’s weak job statistics will be revised down, showing minimal job growth by 2025. He suggests aiming for a neutral policy around 3%, compared to the current rate of 3.50% to 3.75%. Looking ahead to 2026, there are reports of planned layoffs and uncertainties about job growth, risking a major decline in the job market. Inflation, excluding tariff effects, is close to the Federal Reserve’s 2% target and is expected to be aligned with this target. A key signal from the Federal Reserve indicates that current policy is too tight and that the labor market is weaker than it seems. This suggests we should prepare for more significant interest rate cuts than currently anticipated. This perspective challenges the mainstream view and might present an opportunity if proven accurate. This outlook on a weak labor market has backup. For instance, 2025’s initial job data was significantly revised down by the Bureau of Labor Statistics, reducing the yearly job total by over 450,000. The latest Job Openings and Labor Turnover Survey (JOLTS) shows job openings fell to 7.8 million, the lowest in two years, indicating a drop in demand for workers.

Investment Strategy

The reasoning to ignore tariff-related inflation is also supported by recent price data. The Consumer Price Index reading for December 2025 was 3.1%, but the Fed’s favored measure, Core Personal Consumption Expenditures, was much closer to the target at 2.3%. This gap suggests that underlying inflation is under control. Given this viewpoint, we should consider trades that benefit from falling interest rates. Buying call options or bull call spreads on 10-Year Treasury Note futures (/ZN) would be a straightforward way to position for lower yields in the coming weeks, betting that the bond market will anticipate the rate cuts Waller recommends. In the stock market, a more dovish Federal Reserve usually helps stocks. Therefore, we should look into buying call options on the S&P 500 or Nasdaq-100 indices with expirations in the next 45 to 60 days. This could capitalize on any market rally fueled by expectations of easier monetary policy. However, we shouldn’t overlook the warning of a significant decline in the job market. As a safeguard, we could buy out-of-the-money put options on a high-yield bond ETF like HYG. If the labor market suddenly weakens, credit spreads would likely widen, increasing the value of these puts and offsetting some losses from bullish positions. Create your live VT Markets account and start trading now.

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