The Federal Reserve will soon share the minutes from its July meeting, and the markets are eager for information on potential rate cuts. At the last meeting, the Fed chose to keep interest rates steady, but two governors, Waller and Bauman, voted for a 25 basis point cut, a rare occurrence not seen since 1993. Most members were cautious about how tariffs might affect inflation while viewing the job market as healthy. However, a recent employment report showed disappointing results, with an average job gain of just 35,000 over the last three months. Current market predictions indicate an 84% chance of a rate cut in September and another by year-end.

Insights from the Federal Reserve Meeting

The upcoming minutes are expected to show a divided yet careful Fed, weighing inflation worries against the need for possible rate cuts. Observers are keen to see how the Fed views employment strength based on the previous meeting. Surveys suggest mixed expectations for Fed Chair Powell’s upcoming speech, with most anticipating a neutral tone. The FOMC minutes, which serve as the official record, are put together by Fed staff and reviewed for precision, providing a clear overview of discussions. Meanwhile, U.S. indices experienced smaller declines ahead of this release, with the S&P down by 22.56 points, NASDAQ by 170 points, and the Dow unchanged. Fed’s Bostic is scheduled to speak later. With an 84% likelihood of a rate cut in September, we’re paying close attention to today’s July Fed minutes release. It’s crucial to see if the discussion recognizes the economic risks highlighted by dissenters Waller and Bauman. Their concerns seem to be supported by the weak employment report from August 1st, which showed job growth slowing considerably. The disappointing employment data, combined with an unemployment rate that rose to 4.1% last month, places the Fed in a tough spot. The core PCE inflation rate, which the Fed prefers to use, has remained steady at around 2.6%, weakening arguments that tariffs pose a current inflation threat. This strengthens the case for an “insurance cut,” compared to the situation in July.

Market Reactions and Strategy

Given this situation, there’s a heightened risk of a policy mistake, creating chances for volatility. The VIX index has risen from a low of 13 to over 17 in the past month, indicating increased uncertainty. We are considering buying VIX calls or using SPX options straddles to prepare for a bigger market move following the minutes or Powell’s upcoming speech in Jackson Hole. If the minutes suggest that the Fed’s core leadership is leaning toward a full easing cycle, we could see a strong rally in risk assets. We can recall the Fed’s dovish shift in early 2019, which led to a significant multi-month climb in equities. A similar indication now could be a reason to buy short-dated, out-of-the-money call options on major indices. On the other hand, if the minutes and subsequent speeches convey a “one-and-done” approach to cuts, the market might be disappointed. With the NASDAQ currently testing its 200-hour moving average, a hawkish surprise could lead to a technical drop. We stand ready to buy put spreads to hedge against this downside risk if the Fed’s language turns out to be more cautious than expected. Create your live VT Markets account and start trading now.

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