Alberto Musalem, the President of the St. Louis Federal Reserve Bank, spoke about the need for caution in the Federal Reserve’s policies at a meeting of the Institute of International Finance. He mentioned that another interest rate cut could happen if job risks rise and inflation stays low. Musalem highlighted the importance of the Fed avoiding a fixed plan and instead taking a balanced approach to monetary policy decisions.

Impact of Tariffs on Economy

Musalem raised concerns about how tariffs are affecting the economy and may continue to do so next year. Retailers are feeling the pressure to pass on tariff costs to consumers, which affects their purchasing power. However, tariffs are not impacting service inflation. Musalem wants to aim for a 2% inflation rate and expects it to return to this level by the second half of 2026. He observed that the job market is near full employment but is cooling down due to changes in immigration, with the breakeven rate for new jobs set at 30,000 to 80,000. Despite these issues, he does not expect any immediate problems in the job market. Musalem pointed out that monetary policy is currently between restrictive and neutral, with financial conditions remaining supportive. Meanwhile, independence and transparency in monetary policy are very important. The Federal Reserve is indicating it will be cautious and not follow a fixed path in the coming weeks. We should anticipate that policy will be determined during each meeting, responding to new data. This uncertainty suggests that being flexible is more beneficial than sticking to a long-term plan. The Consumer Price Index for September 2025 shows that core inflation is still high at 3.1%, primarily driven by services. This supports the idea that more effort is needed to bring inflation down to the 2% target. The labor market is also showing signs of cooling, with the last payroll report adding only 150,000 jobs, reinforcing the notion that job risks have increased.

Market Strategies Amid Uncertainty

In this “particularly uncertain moment,” we should think about strategies that can benefit from increased price volatility. Expect greater implied volatility, as seen with the VIX, which has been rising from its lows earlier this year, ahead of the upcoming jobs and inflation reports. Considering options, buying straddles or strangles on major indices could be a way to prepare for significant moves in either direction. It’s too early to expect aggressive rate cuts, particularly after the quarter-point cut in July 2025. The commentary implies a readiness to cut rates again only if job risks become much more severe. This suggests that derivatives linked to short-term interest rates, like SOFR futures, may be overestimating the chances of quick easing. Reports from business contacts indicate that credit conditions are positive, which aligns with the historically tight credit spreads seen throughout most of 2025. This suggests that corporate debt markets are not showing widespread stress yet. Therefore, broad hedges using credit default swaps might be premature at this time. The main challenge we face is the persistent inflation in services and a job market that is cooling but not collapsing. The Fed needs to see more progress in reducing inflation before it feels comfortable cutting rates again. This means the upcoming Personal Consumption Expenditures (PCE) inflation report will be crucial for planning before the next FOMC meeting. Create your live VT Markets account and start trading now.

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