Market Expectations

Credit Agricole expects the Federal Reserve to lower interest rates twice before the year ends—once in September and again in December. They predict the target rate will drop to 4.00% after a period of steady policy. This forecast comes from ongoing inflation, which limits the Fed’s ability to make big changes to monetary policy. The US economy is slowing down but not heading into a recession. Credit Agricole finds the job market to be fairly stable. This stability allows the Fed to avoid major reductions in rates. While inflation might temporarily rise due to tariffs, any impact is likely to be brief. As the US awaits the next jobs report, which will help guide the Fed’s decisions, the outlook aligns with expectations for rate cuts beginning in September. We anticipate two rate cuts of 25 basis points each by the year’s end. However, because inflation remained stubborn at 3.4% in July 2025, the Fed won’t be able to make dramatic cuts. This situation indicates a slow, careful approach to reducing rates.

Investment Strategies

We are closely monitoring interest rate futures linked to SOFR, which show a strong chance of the first cut happening next month. The upcoming jobs report, due in early September, could change these expectations. If the report is unexpectedly strong, it might challenge the idea of a rate cut in September and increase short-term market volatility. In this context, we expect a modest rise in stock prices, unlike the sharper market movements we observed in late 2023 when rate cuts were first anticipated. Given the unpredictability, options strategies that thrive on increased volatility, like purchasing straddles on the S&P 500 before major data releases, could be beneficial. The CBOE Volatility Index (VIX) is currently around 15, which is low historically and offers a cost-effective opportunity for volatility trades. The job market remains robust, evidenced by the last Non-Farm Payrolls report, which added 190,000 jobs. This gives policymakers a reason to be patient. Consequently, we see trading strategies heavily reliant on fast rate cuts as risky. Data indicating continued economic strength may pose short-term challenges for both bonds and stocks. Additionally, we must note that tariffs could lead to a temporary increase in inflation later in the year. This complicates straightforward predictions that interest rates will only fall. It may be wise to protect long-term positions against possible short-term spikes in inflation expectations. Create your live VT Markets account and start trading now.

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