The Federal Reserve’s Daly suggests that the Fed may need to change its policy in the next few months. She believes they can’t wait for everything to be perfectly clear before making a move. Tariffs are not expected to lead to lasting inflation that would require changes in monetary policy. The job market has weakened, and further slowdown would be problematic.

Monetary Policy Adjustment

The Fed’s monetary policy must adjust to fit the risks to its goals. Daly spoke at the Anchorage Economic Summit about inflation and the slowing economy. She mentioned that inflation is decreasing, excluding the impact of tariffs, as the economy cools and monetary policy stays tight. Further weakening of the job market is a concern since it can decline rapidly once it starts to falter. Daly’s willingness to consider a rate cut shows that FOMC officials are leaning toward this in upcoming meetings. She suggests that two rate cuts in 2025 might be appropriate, and a cut in September is becoming more probable. With increasing signs of a policy shift, traders should prepare for an interest rate cut soon. Key officials are changing their tone, which reduces uncertainty about the Federal Reserve’s next steps. This makes it important to focus on positioning for lower rates.

Labor Market Concerns

Concerns about the labor market are a major factor in this potential change. The unemployment rate rose to 4.2% in July 2025, and last week’s jobless claims were higher than expected, indicating a risk of a quick slowdown. Officials want to act before the labor market deteriorates further, noting it can “fall quickly and hard.” This shift toward a softer stance is supported by easing inflation. The latest Core PCE reading for July was 2.5%, getting closer to the Fed’s 2% target than earlier this year. This allows officials to focus more on employment issues. For equity traders, this means they might want to buy call options on major indices like the S&P 500. Lower rates typically improve stock values and corporate profits, similar to what happened during the market rally in early 2024 when the Fed first hinted at halting rate hikes. The current situation feels much like that previous period of anticipation. The most direct strategy involves interest rate derivatives. It could be wise to go long on Secured Overnight Financing Rate (SOFR) futures, as their prices will increase once the market fully expects a September rate cut. This offers a straightforward way to bet on the Fed’s anticipated policy change. In the currency market, the U.S. dollar may weaken as lower rates make it less attractive. Traders might consider buying futures or call options on currencies like the Euro or the British Pound compared to the dollar. This trade gains from a drop in U.S. interest rate expectations relative to other nations. Volatility is also key to consider, as it has been high due to uncertainties about policy. As the road to a rate cut becomes clearer, we can expect the VIX index to fall. Selling VIX calls or VIX futures could be a profitable strategy for those who believe the Fed’s clearer stance will ease market anxiety. Create your live VT Markets account and start trading now.

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