The Federal Reserve wants to lower inflation to its 2% goal, but current rates are still much higher. The unemployment rate suggests we are close to full employment, with about 50,000 to 75,000 jobs being replaced each month. There are worries about job trends, and it is still uncertain whether there will be one rate cut this year. Although business costs are rising, their impact on prices is unpredictable, and the Fed’s current policy is somewhat restrictive.

Economic Fundamentals Are Strong

Many believe that economic fundamentals are solid, and by the end of the year, there should be enough clarity for businesses to make important decisions. The plan is to adjust monetary policy to a more neutral stance by 2026, but changes may happen due to ongoing data updates. Bostic, who does not vote at the Fed, prefers one rate cut by the end of the year while keeping a mostly neutral but slightly hawkish view. Consistency in policy is crucial, but flexibility is also important. The Federal Reserve appears to be cautious, which contrasts with the market’s hopeful outlook on rate cuts. Inflation data from July 2025 still shows a stubborn 3.4% year-over-year, meaning the idea of only one cut this year should lead traders to rethink positions that rely on quick rate relief. This creates opportunities in options for SOFR futures, especially for betting against the large cuts anticipated in early 2026. Concerns about a “potentially troubling” employment situation and frequent data changes will likely increase market volatility. The latest jobs report indicated payrolls increased by only 85,000, aligning with the slower replacement rate and confirming this trend. This unpredictability suggests we should consider buying protection or setting up trades that take advantage of sharp market movements, making VIX derivatives and straddles on major indices appealing in the coming weeks.

Current Market Outlook

Since the Fed paused its interest rate hikes in late 2023, we’ve been in a holding pattern, and the market is anxious for easing. Officials have made it clear that the bar for a first rate cut remains high to ensure it aligns with a “consistent” policy direction. This long period of restrictive policy intends to cool demand gradually, and we are beginning to see the effects on the job market. For our positions, this suggests we should sell out-of-the-money calls on interest rate futures, as the path to lowering rates seems to be taking longer than expected. The S&P 500 has been trading within a narrow range, and while fundamentals are considered strong, the restrictive policy may keep this sideways behavior going. Strategies like iron condors on major indices could help us profit from the anticipated lack of strong trends as we move into autumn. Create your live VT Markets account and start trading now.

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