The President of the St. Louis Federal Reserve noted that the US economy is stable, but some challenges remain. There are ongoing skilled labor shortages, and companies are cautious about spending and hiring. However, pressure from funding has lessened. Most of the tariff effects on inflation are expected to decrease. Still, there’s a chance that inflation may stick around, which could negatively impact jobs if economic activity slows.

The Federal Reserve’s Monetary Goals

The Federal Reserve aims for price stability and full employment. It adjusts interest rates to achieve these targets. Raising interest rates can strengthen the US Dollar, while lowering them may weaken it. Quantitative Easing (QE) and Quantitative Tightening (QT) are special measures used during economic crises. QE can weaken the US Dollar by increasing the money supply, while QT can strengthen it by cutting back on bond purchases. Currently, US economic activity appears steady, but the situation is fragile. The jobs report for July 2025 showed only 150,000 new jobs added, which was below expectations and highlights potential risks in the job market. This uncertainty complicates the Federal Reserve’s next steps, making the markets anxious. While some price pressures are easing, we still face ongoing inflation. The latest Consumer Price Index for July 2025 was 3.1%, reminding us that the battle against inflation isn’t over, similar to the resistance we experienced in 2023. This pushes back expectations for immediate interest rate cuts while keeping the possibility of an additional rate hike open.

Market Volatility and Investment Strategies

With a slowing job market and persistent inflation, we expect increased market volatility. Buying options could help protect our portfolios. Strategies like straddles on the S&P 500 could profit from big market moves in either direction. The CBOE Volatility Index (VIX) is currently at a moderate 16 but could rise before the Federal Reserve’s September meeting. The Federal Reserve’s commitment to controlling inflation suggests that interest rates will stay high longer than previously anticipated. This approach supports a stronger US Dollar since higher rates attract foreign investments. We could consider using currency derivatives, such as buying call options on the U.S. Dollar Index (DXY), to profit from this potential strength against other currencies. It’s also important to note that the Fed’s Quantitative Tightening program is ongoing. By reducing its bond holdings by billions each month, the Fed is quietly pulling liquidity from the system. This policy supports the US Dollar and makes it less likely to weaken significantly. Create your live VT Markets account and start trading now.

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