Former Dallas Fed President Kaplan thinks the Federal Reserve might lower interest rates in September, although the decision could be postponed. He believes the rate could decrease to between 3.25% and 3.50%. Kaplan doesn’t expect a series of ongoing cuts. He estimates the Fed has the capacity to reduce rates by 75 to 100 basis points before pausing. He highlights the need for a Fed Chair who is innovative and independent.

Future Approaches and Political Independence

Kaplan hopes for future strategies that are creative while upholding political independence. He emphasizes the need for accurate data in decision-making. There is a possibility of a Federal Reserve interest rate cut in September. The market seems to agree, with Fed Funds futures indicating an 85% chance of a 25 basis point cut next month. This expectation grew after the July 2025 jobs report showed job growth slowing to 150,000, and the unemployment rate rising to 4.2%. This presents a strategy for traders using short-term interest rate products, like SOFR futures, to prepare for lower rates leading up to the September meeting. However, caution is advised since the path ahead remains uncertain. Many believe this might not mark the beginning of a series of aggressive cuts. We anticipate the Fed will move carefully, as the July 2025 CPI inflation data, while down to 3.1%, is still above their 2% target. Thus, any cut will likely be a cautious step rather than a shift to easing policy. This scenario could result in a “hawkish cut,” surprising markets and raising volatility.

Strategies for Traders Amid Uncertainty

Due to this uncertainty, options on indices or interest rates may prove beneficial. Traders might explore strategies that profit from increased volatility, especially around the upcoming August inflation report and the Jackson Hole symposium later this month. A similar strategy was seen in 2019 during the Fed’s mid-cycle adjustment when rates were lowered, but it was clear that further cuts were not guaranteed. In the long run, the Fed has the potential for about 75 to 100 basis points of total cuts, possibly bringing the policy rate to a 3.25% to 3.50% range. However, this process will likely be gradual and take place over several months, or even longer. Ultimately, we must prioritize incoming data. The upcoming August CPI and employment reports will be crucial to determining if the Fed will make a move next month, significantly impacting market positioning in the weeks ahead. Create your live VT Markets account and start trading now.

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