Neel Kashkari, the President of the Minneapolis Fed, has suggested that the US might see two interest rate cuts by the end of this year. This possibility arises from a slowing economy, but the effect of tariffs on inflation is still unclear.

Importance of Policy Changes

Kashkari highlights the need to change policy rates soon to help with the economic slowdown. There is uncertainty about future inflation due to tariffs, which could lead the Fed to pause or raise rates instead. Current economic data shows that wage growth is decreasing, indicating a weaker job market. The Fed is aware of this and understands that unemployment numbers can change. Kashkari insists on the validity of economic data and how people perceive the economy in real life. He believes that economic conditions are real, and it’s hard to convince people otherwise using job or inflation statistics. As the Fed hinted at two rate cuts for this year, markets are reacting to the slowing economy. The July 2025 jobs report confirmed this trend, showing weaker hiring and wage growth slowing to 3.5% annually. This has changed expectations for the first rate cut, which might come as soon as the September meeting. However, potential inflation from tariffs poses a significant uncertainty. The July 2025 Consumer Price Index (CPI) rose slightly to 3.4%, reminding us that pricing pressures are still present. This uncertainty suggests that traders might want to consider buying volatility through tools like VIX futures or options straddles on major indices to protect against any unexpected moves by the Fed.

Traders and Market Reactions

Traders are positioning for lower rates by using interest rate derivatives. Currently, futures markets show a high likelihood of a 25-basis-point cut in September and a strong chance of a second cut by December. Those who believe in the slowdown should consider going long on short-term interest rate futures, such as SOFR contracts, to take advantage of this anticipated policy change. This situation feels similar to late 2018 and 2019 when the Fed had to shift quickly from tightening to easing as the economy slowed due to trade pressures. Historical patterns suggest that once the Fed starts cutting rates, changes can occur faster than expected. It’s also important to note that the Fed is paying attention to more than just headline data; they’re focused on the real economic experiences of people. This means that even if inflation remains high, signs of a general slowdown in consumer spending or business investment could prompt a policy shift. We should avoid getting too fixated on any single data point, like CPI, when the overall trend suggests weakness. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now