Federal Reserve Bank of Richmond President Thomas Barkin highlighted the economy’s strength, even though inflation remains above target. Rate cuts are viewed as a safeguard for the labor market, as the Fed aims to wrap up its efforts to reduce inflation. Barkin pointed out the strong economic growth and low unemployment, making it unlikely for businesses or consumers to cut back. Increased productivity helps companies manage rising input costs without raising their prices. Businesses are reporting steady demand and avoiding large-scale layoffs.

Economic Stimulus

Deregulation and adjustments in taxes and withholding are helping to stimulate the economy. Despite inflation being over target, we expect more progress ahead. Job growth and spending are focused in particular sectors. The ongoing inflation above the target since 2021 could impact future inflation trends. A slow increase in labor supply, caused by dropping immigration and low birth rates, presents a long-term challenge for the economy. We are witnessing a remarkably resilient economy, but achieving the final goal of reducing inflation is tough. The recent Consumer Price Index (CPI) reading from January shows a stubborn 2.8% year-over-year increase, highlighting that this “last mile” is the toughest. This situation introduces uncertainty for the Federal Reserve’s future decisions. The strong jobs report in January, revealing the addition of 210,000 payrolls and maintaining unemployment at 3.6%, provides the Fed little reason to hasten rate cuts. The market has reacted by almost fully removing a rate cut from expectations for the March Federal Open Market Committee (FOMC) meeting. Derivative actions on short-term rates, like selling SOFR futures, are set for this higher-for-extended period scenario.

Market Volatility Ahead

The tension between solid economic growth and ongoing inflation is likely to cause increased market volatility in the coming weeks. The VIX index is currently around 19, reflecting this uncertainty based on data. We suggest buying short-term options, such as straddles or strangles on major indices, as a smart way to prepare for sharp market moves following key data releases. As observed throughout much of 2025, economic strength is unevenly distributed, leading to clear winners and losers across different sectors. With this in mind, we are considering options on sector-specific ETFs to express views on performances relative to each other. For example, put spreads on consumer discretionary sectors could offer protection against a slowdown, while call spreads on technology or industrial sectors might capture continued strength. The ongoing inflation overshoot since the early 2020s, combined with worries about slow labor supply growth, should not be overlooked. These structural issues suggest that wage pressures could resurface, forcing the Fed to keep a hawkish approach longer than expected. This context supports holding longer-term hedges against a sudden rise in inflation expectations. Create your live VT Markets account and start trading now.

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