Thomas Barkin, President of the Federal Reserve Bank of Richmond, said it is not the right time for strong forward guidance because of uncertainty around inflation, US employment, and the long-term effects of artificial intelligence (AI) on the labour market. He said he is uneasy about risks on both sides of the Fed’s mandate and is not leaning towards focusing mainly on inflation or employment.
Barkin said recent job growth is encouraging, but job losses linked to AI are possible. He added that employers outside the software sector are not yet cutting headcount because of AI, and that it is hard to draw clear conclusions about AI’s short- and long-term effects.
Fed Hesitation Keeps Markets Data Dependent
He said longer-term, bond-market-based inflation expectations do not appear to have broken out, and that bond yields remain in a reasonable range. He also questioned whether supply and demand in the long-term Treasury market has shifted because of the amount of US debt supply.
Barkin said businesses are less confident they can raise consumer prices to recover costs. He also said he spoke with Kevin Warsh on Tuesday to get acquainted.
We see a continued reluctance to offer strong forward guidance, creating an environment where traders must react to data rather than policy signals. Looking back at the data from 2025, we saw the Fed pivot to a more neutral stance after a series of cuts, which differs from today’s indecisiveness. This suggests we should prepare for a market driven by economic reports rather than central bank projections in the near term.
Given this uncertainty, buying volatility appears to be a prudent strategy for the coming weeks. The VIX is currently hovering around a relatively subdued 16.5, which does not seem to price in the potential for sharp market reactions to the upcoming jobs and inflation data. We believe buying VIX calls or straddles on major indices ahead of these key data releases could prove beneficial.
Positioning For Rates And Macro Surprises
Longer-term bond yields seem to be in a reasonable zone, suggesting range-bound strategies on interest rate products may be effective. With the 10-year Treasury yield holding steady near 4.35% for the past month, selling options far out of the money on Treasury futures could generate income. This is especially true given the questions around whether the sustained supply of US debt has permanently shifted the market’s balance.
We are also taking the nervousness around potential job losses due to AI seriously as a tail risk. The unemployment rate ticked up to 4.1% last month, and we view buying cheap, long-dated out-of-the-money puts on industrial or transportation sector ETFs as a necessary hedge. This provides protection against any sudden negative shift in the labor market narrative that could surprise the consensus.
On the other side of the mandate, the observation that businesses are less confident in their ability to raise prices is key. This implies that while headline inflation has fallen to 2.9%, any upside surprise from supply shocks could catch the market off guard. We believe holding some exposure to inflation-linked assets or call options on commodity ETFs remains a cost-effective way to hedge against this risk.
