Inflation and GDP Projections

The unemployment rate is expected to stay at 4.5% until the end of 2025 and drop slightly to 4.4% in 2026. The Personal Consumption Expenditures (PCE) Price Index is predicted to fall to 2.9% by the end of this year, further decreasing to 2.4% in 2026 and 2.1% in 2027. The “Dot Plot” shows interest rate predictions from the Federal Open Market Committee (FOMC). This tool helps us understand how economic factors like growth and inflation might change. It is published quarterly and serves as a guide for forecasting economic trends and potential interest rate changes, which can affect the value of the US Dollar. Any unexpected data compared to earlier forecasts could impact currency values. After the Federal Reserve’s recent rate cut on December 10, 2025, the new dot plot carries significant weight. It suggests a much slower approach to easing, with only two more cuts of 25 basis points each expected by the end of 2027. This change means we may need to reassess interest rate derivatives, as hopes for quick cuts in 2026 have faded. This careful approach is supported by new data showing a strong economy, justifying the Fed’s upgraded GDP forecast. For example, the November 2025 Consumer Price Index reported a surprising 3.2%, and retail sales for that month rose by a solid 0.8%. These strong indicators show that the economy does not require aggressive stimulus, reinforcing a “higher for longer” rate environment.

Strategic Financial Adjustments

In the coming weeks, we should think about adjusting our positions in interest rate futures that had anticipated larger cuts for 2026 and 2027. Unlike the typical easing cycle, like the one that started in 2019, this situation might be different. The hawkish guidance could keep long-term yields high, leading to a flatter yield curve as short-term rates decline slowly. This outlook is likely to support the US Dollar, making bullish positions in currency derivatives appealing against currencies from more dovish central banks. For equity derivatives, the possibility of sustained higher rates could challenge growth-focused sectors. We may see a higher demand for put options on tech-heavy indices as a way to hedge against this scenario. Create your live VT Markets account and start trading now.

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