The US economy is expected to grow at or above its full potential by 2026. This growth is due to government spending and previous adjustments to interest rates. Right now, inflation is slightly under 3%, but it is likely to drop to around 2% this year as the job market cools off in an orderly way. The Federal Reserve’s policy is seen as neutral, giving it room to react to changes in the economy. Current indicators, like unemployment rates and job growth, show a strong labor market, but there are still worries about ongoing inflation.

No Immediate Need for Policy Easing

There’s no urgent need to make policy changes right now. However, if job market issues arise or inflation falls faster than expected, the Fed might reconsider cutting interest rates. While there are challenges with housing affordability, the main goals remain managing inflation and unemployment. It’s uncertain whether the US will shift to a state of higher productivity. The Federal Reserve is focused on bringing inflation down to 2% and encourages open discussions among policymakers to inform decisions. Despite new leadership, the Fed’s method of discussing policies is likely to stay consistent. Since the Fed believes current policy is neutral and effective, we can expect a halt in rate cuts. Therefore, the market’s hopes for another rate cut in the first quarter of 2026 may be overly optimistic. The focus is now on whether inflation decreases more swiftly or if the job market weakens significantly. This cautious approach is supported by recent data. The December 2025 jobs report showed a solid addition of 155,000 jobs, reinforcing that the labor market is strong but cooling down rather than failing. Moreover, with the latest Consumer Price Index (CPI) inflation at 3.1%, the Fed justifies waiting for more clear improvement towards its 2% goal.

Opportunities in Interest Rate and Equity Markets

For interest rate traders, the chance of a rate cut in March, previously estimated at about 40% by the CME FedWatch Tool, is likely to decrease significantly. This situation opens an opportunity to bet on short-term rates staying higher for longer than the market predicts. Traders might consider selling SOFR futures contracts for March or June 2026 to take advantage of this pricing change. In the equity markets, the message is clear: the economy is strong, but the benefit of aggressive rate cuts is currently absent. This indicates a market that may move within a set range instead of breaking out strongly, making options strategies based on low volatility attractive. Selling out-of-the-money call and put spreads on major indices could effectively generate income in the coming weeks. This “wait and see” approach will likely reduce market volatility, as the central bank is signaling stability. The VIX index, which fluctuated during the 2025 debt ceiling talks, may continue to fall. Therefore, it’s wise to prepare for calmer times by shorting VIX futures or selling VIX call options. Create your live VT Markets account and start trading now.

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