The Dow Jones Industrial Average gained 150 points on Friday, closing the week near 48,000. This rise was supported by September’s US Personal Consumption Expenditures Price Index data, which strengthened market confidence in a likely Federal Reserve interest rate cut on December 10. The Standard & Poor’s 500 rose by 0.3% on Friday, positioning it to reach all-time highs soon. Core PCE inflation held steady at 2.8% year-over-year in September, unchanged from August, despite delays caused by the longest US government shutdown. The University of Michigan’s Consumer Sentiment and Expectations Indexes for December exceeded expectations, while one-year and five-year Consumer Inflation Expectations from UoM dropped slightly. Market momentum might slow down before the Federal Reserve’s rate decision on Wednesday. December’s meeting will also update the Summary of Economic Projections, which outlines interest rate expectations from the Fed policymakers. The Core PCE measures monthly price changes in US goods and services and is the Fed’s favored inflation indicator. A high Core PCE reading typically strengthens the US Dollar, while a low reading has the opposite effect. With the Dow Jones nearing 48,000, markets are anticipating a likely interest rate cut from the Federal Reserve on December 10. This would mark the third consecutive cut, a significant shift in policy that started earlier this year due to a slowing economy. The market’s positive trajectory relies heavily on the expectation of cheaper money. Despite the September PCE inflation data being old, it shows a core rate of 2.8%, which is viewed positively. This is largely due to the major government shutdown this autumn. More crucially, the November Consumer Price Index report released last week confirmed a cooling trend, with core inflation falling to 3.1%. This gives the Fed a solid reason to proceed with another cut next week. December’s consumer sentiment numbers were strong, while inflation expectations dipped, creating a “soft landing” outlook that is boosting the market. Currently, the CBOE Volatility Index (VIX) is low at 13, indicating that investors are not overly worried as they approach the Fed meeting. Since over 90% chance of a rate cut is already factored in, according to the CME FedWatch Tool, the actual announcement may not lead to significant movement in the market. Instead, the focus should be on the Fed’s updated dot plot and economic forecasts. We should be ready for a “sell the news” reaction if the Fed’s guidance for 2026 isn’t as favorable as the market hopes. With low implied volatility, buying options is relatively inexpensive right now. Traders might want to consider purchasing call options on the S&P 500 to take advantage of positive momentum through the year’s end, especially if the Fed’s message is encouraging. A dovish stance from the Fed could push the index beyond its all-time highs. However, we should also prepare for a hawkish surprise in the forward guidance. If the dot plot suggests fewer rate cuts next year, this rally could reverse quickly. Buying some inexpensive, out-of-the-money put options on major indices could offer an affordable way to protect against a sudden downturn. We faced a similar situation in late 2023 when markets surged on the promise of a Fed pivot, only to deal with volatility as the timing was delayed. This experience shows that the Fed’s future plans are often more significant than the immediate rate decision. The market’s reaction on December 10 will largely depend on the wording in the statement and the new projections. This anticipated rate cut is also putting pressure on the US Dollar, favoring assets priced in the currency. With Gold nearing $4,200 an ounce, a confirmed dovish stance from the Fed could drive it even higher. Trading gold-backed ETFs with options is a direct method to capitalize on this potential outcome.

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