Austan Goolsbee, President of the Federal Reserve Bank of Chicago, said on CNBC on Monday that the Fed is facing an intense period with a lot at stake. He said inflation has, at best, stalled, and the Fed is waiting for that to ease as a new shock has emerged. He said the period ahead will be tough for the Fed. He added that rates could go down by the end of 2026, but only if there is proof that inflation is improving.

Dollar Outlook Under Higher For Longer

He said petrol prices can strongly affect household expectations, and the Fed hopes this does not have a lasting effect. He noted that the unemployment rate has not risen much, and that job creation may not be a good measure of labour market slack. He said inflation now appears to be the main risk. He also said no one can tell the Fed what will happen in the conflict. After these comments, the US Dollar Index stayed under modest bearish pressure and moved slightly below 99.50. We are in a difficult moment where inflation has stalled at best, and a new external shock is complicating the outlook. The path forward for the Federal Reserve is unclear, making this a tough period for setting policy. We should not expect rate cuts anytime soon, with the end of 2026 being the most optimistic timeline mentioned.

Positioning And Volatility Implications

The latest Consumer Price Index (CPI) report for February 2026 supports this caution, showing inflation ticking up to 3.4% year-over-year, a reversal from the cooling trend we saw last year. With the Fed Funds Rate holding steady in the 5.25%-5.50% range, this sticky inflation is the primary risk. Therefore, positioning in interest rate futures should reflect fewer, if any, rate cuts being priced in for the remainder of this year. This environment is fundamentally supportive of a stronger US dollar, even with the recent dip below 99.50 on the index. That slight weakness should be viewed as a potential entry point, as the interest rate differential will favor the dollar against other major currencies. We remember how the dollar index surged above 110 back in 2022 when the Fed was aggressively hiking, and a similar “higher for longer” stance now could trigger another leg up. The mention of an ongoing conflict and rising gas prices introduces significant uncertainty into the market. This points toward higher expected volatility, suggesting that buying protection is a prudent strategy. Options on the VIX index, which is currently elevated near 22, could be an effective hedge against sudden market dislocations caused by geopolitical events. Looking back, we can see parallels to the situation in 2025, when markets initially anticipated several rate cuts that never materialized because inflation proved more persistent than expected. The labor market remains strong, with unemployment holding below 4%, giving the Fed little reason to ease policy preemptively. Job creation figures are no longer seen as a reliable indicator of economic slack. Create your live VT Markets account and start trading now.

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