The President of the St. Louis Federal Reserve has highlighted the need to balance inflation and employment goals. He is concerned that new tariffs may lead to a long-term increase in inflation, which is predicted to return to 2% by the second half of 2026. For the job market, the key range is between 30,000 and 80,000 jobs added each month. Economic uncertainty is decreasing, and fiscal policy may give extra support. Modest GDP growth is expected this year, with a return to normal levels by 2026. The job market should stay close to full employment, but some cooling and risks are likely. The inflation effects of tariffs should fade in two to three quarters. Anecdotal evidence is considered very significant. The structure of the Fed aims to keep policy decisions free from political pressure. The President has concerns about possible inflation shocks related to tariffs and trade agreements like NAFTA. He emphasizes the need to balance economic objectives in light of these issues. The Fed appears ready to maintain high interest rates for now. The recent August CPI report showed inflation at 3.4%, which is still above their target. This supports their current tight policy, meaning we shouldn’t expect rate cuts soon as they weigh inflation against employment goals. Last week’s non-farm payroll growth of 150,000 jobs aligns with their view of a cooling, but stable, labor market. This number is well above the breakeven range of 30,000 to 80,000 jobs per month, giving them no reason to ease up on policies. Therefore, there is a risk that the job market may weaken from this point forward. The new 15% tariffs on European goods are the main unknown factor for the next two or three quarters. These tariffs could bring a new inflation shock just as things were starting to settle. This reinforces the idea that interest rates will stay high for a longer time, as the Fed doesn’t expect inflation to return to 2% until the second half of 2026. For derivatives traders, betting on sustained high rates seems wise. Options on SOFR futures that expire in early 2026, which speculate against rate cuts, may be a good strategy. Remember how inflation spiraled out of control in 2022 – the Fed is keen to avoid a repeat. With uncertainty continuing, especially regarding possible trade disputes next year, we should be ready for more market fluctuations. Buying protective measures, like put options on the S&P 500 or VIX calls, makes sense as a hedge. Reflecting on the trade disputes of 2018-2019, we observed how sentiment could change drastically with a single announcement.

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