The Federal Reserve (Fed) has cut interest rates by 25 basis points, setting the target range at 3.50–3.75%. This decision showed a split among members, with a 9–3 vote. Some wanted larger cuts, while others disagreed with any reduction. The Fed’s statement shows they are reevaluating economic conditions. They are looking closely at the softening job market and inflation from tariffs. They describe growth as moderate, noting slower job gains and slightly higher inflation. The risks in employment have changed, leading to different views on policy adjustments. Starting December 12, the Fed will resume buying Treasury bills for reserve management, beginning with about $40 billion and then scaling back. Projections show little change from September, with more rate cuts expected in 2026 and 2027. Unemployment is likely to stay around 4.4% in 2026, and growth predictions for the next year have slightly improved. Fed Chair Powell highlighted the challenge of lowering inflation while supporting the job market. They do not expect to raise rates, and the focus has shifted to maintaining or possibly reducing them. Payroll growth may have been exaggerated, which influenced the decision to cut rates. Tariff-related inflation is under scrutiny, as rising prices of goods are linked to tariffs. Powell believes the overall economy is not overheating, placing policy near neutral levels. Despite the committee’s divide, there is general support for recent actions, coupled with ongoing concerns about employment risks. The Fed’s indications suggest an end to rate hikes, making it a good time to consider a strategy that anticipates a cap on short-term rates. Selling call options on Secured Overnight Financing Rate (SOFR) futures seems wise, as Powell has minimized the risk of further tightening. The discussion now revolves around when and how much to cut rates, not if they will increase. The split vote and data-focused language indicate high volatility around upcoming economic reports. The Fed’s uncertainty means forthcoming payroll and inflation data may lead to significant market shifts. This trend suggests that buying straddles or strangles on interest rate futures could be beneficial ahead of these reports, allowing one to profit from any market movement. This careful approach is confirmed by recent data. The November JOLTS report showed job openings dropping to 7.9 million, a notable decline from more than 12 million in 2022, highlighting a cooling labor market. Additionally, the last CPI report showed core inflation at 2.8%, reinforcing the notion that tariffs are inflating the headline number, even as the underlying trend decreases. For equity markets, the Fed’s focus on risks to the labor market creates a safety net for stocks. We think that their reluctance to cause more economic harm makes selling out-of-the-money puts on the S&P 500 an appealing strategy for earning premiums. A full market crash seems unlikely, as the Fed has expressed its commitment to supporting the job market. There is a noticeable tension between the Fed’s projections and market expectations, presenting another trading opportunity. The official forecast anticipates only one 25 basis point cut in 2026, which seems too slow if the labor market continues to weaken. This situation echoes 2019, when the market accurately predicted the Fed would cut rates faster than they initially planned. Lastly, the new Treasury-bill purchases starting tomorrow will add about $40 billion in liquidity to the system. This move should alleviate short-term funding pressures and support risk assets. This additional liquidity further suggests that the trend is towards lower rates, providing more backing for the market.

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