A Federal Open Market Committee member suggested there may be a rate cut of 25 basis points (or a quarter percentage point) later this year. Business leaders are feeling more positive about managing tariffs, but they expect price increases ahead. The job market remains strong, and consumer spending is holding steady. However, inflation is a concern as businesses run out of options to delay the effects of tariff-related price hikes.

Economic Growth And Inflation Outlook

Economic growth is expected to slow to 1.1% this year, while inflation could rise to 2.9%. Bostic has reiterated support for a single rate cut this year. Based on recent comments from the policymaker, it seems clear that only one small rate reduction—a quarter percentage point—is likely for the rest of the year. This suggests we won’t see significant easing in monetary policy, which might limit overly positive adjustments in futures or options contracts linked to benchmark rates. Bostic’s consistent viewpoint aligns with this outlook, reducing room for different interpretations. At the same time, firms that rely on imports are showing improved ways to manage tariffs. They have adapted to some extent, but they recognize that their ability to absorb costs is nearing its limit. In simple terms, the extra cost cushion is almost gone. Sooner or later, these increased costs will impact prices of final goods and services. Previously, changing profit margins and restructuring supply chains helped hide some of the costs, but those options are becoming fewer. From a broader view, the job market isn’t just maintaining; it remains strong, which supports household spending. This ongoing increase in spending benefits GDP components related to personal consumption. However, inflation presents challenges. While the economy isn’t overheating, rising input costs and reduced flexibility for businesses mean pricing pressures are building. They’re not surging, but they aren’t under control either.

Market Implications And Positioning

We expect official growth to cool this year, dropping to a forecast of 1.1%. While this isn’t a recession, it represents a clear slowdown from previous periods. Meanwhile, inflation is climbing to an expected 2.9%, slightly above the comfort zone. This growing gap between slowing growth and rising prices raises the chance of some market disruptions, particularly in breakeven curves and short-rate hedging instruments. In such times, the yield curve doesn’t always steepen—it may flatten or twist based on forward guidance and inflation data. Some traders may expect that any rise in inflation would lead to earlier rate hikes, but that’s not the case currently. Instead, we’re seeing inflation driven by supply side factors, not the overheating that triggers immediate tightening. Based on this data, we are lowering our expectations for volatility in policy-sensitive instruments. Instead, we’re focusing on how short-term volatility pricing changes as market sentiments adjust. We should also keep an eye on strike skew in rates options over the next few cycles. Demand for hedging may shift in response to downward revisions in growth, even if short-term inflation data fluctuates. Cumulative positioning will need further adjustments. Weekly flow data indicates some portfolios may be overhedged for rate drops that now seem less likely. The policy direction is clearer, and positioning should align with what has been directly communicated. With growth expectations softening and inflation remaining relatively strong, we are moving into a phase where trades between breakevens and real yields may signal more than nominal rate direction alone. This often reflects medium-term policy mispricing more clearly. As inflation dynamics shift and economic activity slows, any aggressive bets on repeated rate cuts are likely too ambitious. We favor well-calibrated exposure using tools that allow for flexibility but minimize exaggerated risk. Current trends suggest more restraint than optimism. Create your live VT Markets account and start trading now.

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