The Federal Reserve is planning to change its policies to better fit the economy. Right now, inflation is high while the job market is slowing down. Tariffs are contributing to the rise in inflation, but these price increases are expected to be temporary. Still, it’s unclear when this will change. The Fed is likely to lower interest rates to support the job market, which they think is weakening.

Possible Rate Cut

A rate cut is expected in September. This might be a one-time decision. The Fed will keep an eye on the economy to see how it responds and evaluate future data. There is some hesitation about changing policies during a time of economic strength. Cutting rates without fully understanding the consequences could be risky. It looks like a September rate cut is highly likely. According to the Fed Funds futures market, traders believe there is over a 90% chance of a 25-basis-point cut at the meeting on September 18th. This means the best opportunities for that specific trade might have already passed. The main issue for us is the mixed data, which makes it hard to predict the future. The last Consumer Price Index (CPI) for July 2025 surprised many by rising to 3.6%, largely due to tariffs. At the same time, the latest jobs report showed that payroll growth slowed for a third consecutive month, reaching just 155,000. This conflict creates a complex situation that Fed officials are trying to manage, making it difficult to plan for October and beyond.

Market Reactions and Positioning

With this uncertainty, there’s a lot of activity in the options markets. The VIX, which measures market volatility, is around 19, indicating that traders are seeking protection and anticipating future fluctuations instead of a clear trend in stock prices. Many traders are using strategies like straddles on the SPY, which can profit from big price movements in either direction after the September meeting. This situation resembles what happened in late 2018. Back then, the Fed had to quickly shift from raising rates to pausing as the economy showed signs of stress from the trade war. It seems they are now more willing to make cuts early to prevent a significant downturn, even if inflation isn’t fully stabilized. As a result, we see a noticeable bearish sentiment regarding the U.S. dollar. The Dollar Index (DXY) has fallen below 102, as markets expect the Fed to ease its policies while other central banks maintain theirs. Traders are buying puts on the dollar or calls on currencies like the euro, betting that this difference in policies will continue. Create your live VT Markets account and start trading now.

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