Goldman Sachs predicts that the Federal Reserve will start cutting interest rates in September 2025, with additional cuts expected in early 2026. These reductions are likely to happen during meetings on September 16-17, October 28-29, and December 9-10. This forecast relies on stable inflation; any increase could change the plan. Analysts believe the Federal Reserve will keep interest rates the same at the upcoming meeting on July 29-30.

Economic Conditions And Job Market

Current economic conditions suggest a gradual shift in policy might happen. The job market is getting weaker, with less hiring in the private sector, raising the chance of a bigger economic slowdown. Additionally, consumer spending has been flat for six months, which is typically seen during recessions. These signs indicate that there could be room for adjusting rates to maintain economic stability. Goldman Sachs’s forecast leads us to think the derivatives market will start reflecting a clearer path toward easing monetary policy. With the first projected rate cut not until September 2025, we should focus on longer-term interest rate futures and options. We can expect a slow decline in long-term yields, creating chances with options on bond ETFs.

Implications For Investment Strategies

Since the forecast hinges on inflation, it signals how to manage risk. The Core CPI recently showed a 3.6% inflation rate; any significant increase in inflation could disrupt this outlook and cause higher volatility. Thus, we should think about buying low-cost, short-term options as insurance around key inflation reports in the upcoming months. This view is backed by a cooling job market. Recent JOLTS data shows job openings dropped to 8.4 million, the lowest in over three years. This trend gives the Federal Reserve a reason to adopt a more lenient policy. We see this as a chance to not overreact to any single strong jobs report since the overall trend is downward. The stagnant consumer spending highlighted by analysts is evident in the recent retail sales data, which showed only a 0.1% increase last month. Normally, such extended weakness without a declared recession is unusual, suggesting that the economy may be weaker than current stock prices suggest. This supports strategies that benefit from slowing growth, like buying puts on cyclical sector ETFs. This situation is reminiscent of the period before the 2019 rate cuts, when anticipation built for months before the actual change. We expect implied volatility on interest rate products to gradually reduce as the market adapts to this new direction. We can take advantage of this by selling volatility on longer-term expirations, while staying flexible enough to respond to any data that contradicts the easing outlook. Create your live VT Markets account and start trading now.

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