Federal Reserve Governor Christopher Waller talked about the future of interest rates, inflation, and the US economy. He noted that inflation is getting closer to the 2% target, but this will not stop rate cuts. If GDP stays strong or the job market improves, the pace of rate cuts may slow down. On the other hand, if the job market weakens, the Fed could lower rates to a neutral level. Currently, the neutral interest rate is 100 to 125 basis points below the current Fed Funds Rate.

Labor Market Data

Waller stressed how vital labor market data is, as it helps determine the Fed’s next steps. Tariffs are expected to have a small impact on inflation, which is still on track for the 2% target. There is a gap between strong economic growth and mixed signals from the labor market. Right now, the Fed is focused on the job market to shape its future decisions. Today’s currency updates show the US Dollar’s performance against other currencies. It dropped 0.16% against the Australian Dollar, while it was weakest against the British Pound and strongest against the Canadian Dollar. Waller’s recent comments show a shift from focusing on inflation to the labor market. Falling inflation isn’t an obstacle to rate cuts anymore; a weakening job market is now the main reason for action. This means upcoming employment data will significantly influence market trends.

Interest Rate Derivatives and Market Strategy

This shift makes sense in light of recent trends. The September 2025 Consumer Price Index (CPI) revealed cooler core inflation at a 3.5% annual rate. This trend indicates that inflation concerns are easing, giving the central bank the flexibility to address other economic issues. The labor market is sending “clear warnings.” The latest jobs report for September 2025 showed Non-Farm Payrolls fell short of expectations, adding only 150,000 jobs, and the unemployment rate rose to 4.1%. Job openings decreased to 8.5 million in August 2025, down from the highs in 2023. This creates a data-driven environment. Therefore, we should expect significant fluctuations around upcoming job reports, such as weekly jobless claims and the monthly payroll data. Derivative traders might consider using strategies that can profit from sudden price movements, like buying options on equity indices or currency pairs ahead of these key releases. Any disappointing job data could lead to a significant market response. For those trading interest rate derivatives, the outlook is getting clearer. The neutral rate is estimated to be about 1% lower than the current Fed Funds Rate, allowing for several cuts. We should prepare for lower rates in the coming months by looking at SOFR futures, as any further labor market weakness is likely to push the Fed to act, similar to the policy changes seen in 2019. In the currency market, this outlook is bearish for the US Dollar. The expectation of rate cuts makes the dollar less appealing, which explains its recent decline against the Euro and Pound. Investors can use options to position for further dollar weakness, for example, by buying calls on EUR/USD or puts on USD/JPY. This market environment is very positive for gold, which benefits from lower interest rates and a weaker dollar. If the Fed begins an easing cycle, gold prices may rise toward $4,300 per ounce. Using gold futures or call options is a direct way to trade based on the expectation of looser monetary policy. Create your live VT Markets account and start trading now.

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