The Federal Reserve is facing criticism for its slow pace in cutting interest rates, even though the U.S. economy is growing faster than expected. Kevin Hassett, the Director of the National Economic Council, believes that the artificial intelligence sector is driving economic growth while keeping inflation low, which opens the door for more rate cuts. The U.S. GDP rose by 4.3% annually in the third quarter, surpassing forecasts. About 1.5 percentage points of this growth is due to tariff policies, which have helped reduce the trade deficit.

Economic Dynamics

The Federal Reserve’s cautious actions contrast sharply with this strong growth. They have lowered rates by a quarter point three times this year. Hassett is often mentioned as a possible successor to Federal Reserve Chair Jerome Powell. The latest decision involved dissent from three members, marking the first such instance since 2019. Powell called the cut a “close call,” and Hassett has distanced himself from former President Trump’s criticism of the Fed, highlighting the importance of the central bank’s independence. Hassett noted several key points, such as the impact of AI on the economy, how consumer sentiment aligns with economic data, and Trump possibly introducing a housing plan next year. Given the stark difference between the 4.3% GDP growth and the Fed’s cautious stance, markets may experience increased volatility. Last week’s Consumer Price Index (CPI) report showed core inflation steady at a manageable 2.8%, suggesting that the Fed can cut rates without risking economic overheating. This situation indicates that strategies profiting from price swings could be valuable in the upcoming weeks. Traders should pay close attention to interest rate derivatives because the market currently underestimates the chance of more aggressive rate cuts. Presently, Fed funds futures predict only a 40% chance of a rate cut at the January meeting, presenting an opportunity for those who believe the Fed will have to soften its stance. Positioning for a steeper yield curve could be a profitable strategy if the Fed is perceived as “behind the curve.”

Market Opportunities

The internal dissent within the Fed, with three members voting against the last decision, is a critical indicator. We saw a similar scenario in 2019 when internal disagreements preceded a more significant shift in the Fed’s policy. This uncertainty makes it wise to buy protection or speculate on volatility with VIX options ahead of the next Federal Open Market Committee (FOMC) meeting. The focus on an AI-driven productivity boost might encourage traders to buy call options on the Nasdaq 100 index. If the Fed adjusts its policies, tech and growth stocks will likely benefit the most, especially with supportive narratives like this. Additionally, the possibility of a new housing initiative from the president next year suggests looking at call options on homebuilder ETFs as a specific trade opportunity. As other major central banks adopt more aggressive easing measures, a dovish Fed could weaken the U.S. dollar. This opens up chances in currency derivatives, such as purchasing call options on the Euro or Yen against the dollar. The stronger-than-expected November jobs report, which showed 195,000 new jobs, is keeping the Fed cautious. Any signs of weakness there could further accelerate these trends. Create your live VT Markets account and start trading now.

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