Fed Governor Stephan Miran said policy should not be set based on short-term headlines, and said it was premature to judge the current situation. He said there was still not enough clarity to know whether monetary policy should react to current events. He said the traditional central bank view is that oil shocks do not feed into core inflation. He said headline inflation is expected to rise, but it is too soon to say it will affect core inflation, and he said he is watching for broad-based second-round effects.

Oil Shocks And Core Inflation

Miran said higher energy prices can depress demand, which can offset some inflation impact. He said it would be highly unusual for the Fed to react to an oil shock now, and said higher oil could push up inflation but this is not yet being seen. He said the labour market could still use support from monetary policy, and that the job market is continuing a gradual softening trend. He added that the balance of risks has worsened on both sides, while the policy outlook still allows for rate cuts. After the remarks, the US Dollar Index was down 0.38% at 99.12. The Federal Reserve is signaling that its plan for rate cuts is still on track. They are telling us not to overreact to short-term events, specifically the recent spike in WTI crude futures to over $105 a barrel. This suggests they see higher energy prices as something that could slow the economy down, not just cause inflation.

Market Pricing And Trading Implications

It’s premature to think this will change their course. The February 2026 CPI report fits this narrative, with headline inflation rising to 3.5% while core inflation remained more contained at 2.9%. The Fed is watching to see if energy costs bleed into other areas, but isn’t seeing it yet. The job market is also giving them room to consider cuts. We saw the latest report for February 2026 show a gain of only 155,000 jobs, which was below the market expectation of 190,000. This gradual softening supports the view that policy may need to be less restrictive soon. Given this outlook, we are seeing the market price in easing. The CME FedWatch Tool now indicates a greater than 75% chance of a rate cut by the June 2026 meeting. This makes long positions in interest rate futures like SOFR attractive, as their prices will rise if the Fed cuts as expected. For equity traders, this dovish stance is a tailwind for the S&P 500. Call options on major indices could be a way to play the potential upside from lower rates. However, with the Fed acknowledging risks on both sides, buying VIX call options or using collars could be a prudent hedge against unexpected volatility. This isn’t a new playbook for the Federal Reserve. When we look back from 2025 at the 2019 cycle, we saw them deliver “insurance” rate cuts to support the economy amid global uncertainty. The current situation, with a softening labor market, looks very similar to that setup. Create your live VT Markets account and start trading now.

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