Policy Rate Path
He said last year’s rate cuts better balanced policy with the Fed’s dual mandates. He also said recent inflation data has been reassuring, and he expects inflation to slow to 2.5% this year and 2% in 2027. Williams said tariffs have been a key driver of inflation, but that this pressure should wane this year. He added that there has so far been no major second-round impact from tariffs, and that most of the tariff effect has been felt domestically. He said the economy is on solid footing and the job market is stabilising. He expects the unemployment rate to edge down this year and next, and forecasts 2.5% GDP growth in 2026. We are seeing the Fed’s long game from 2025 play out, where eventual rate cuts were meant to normalize policy, not respond to a crisis. The two rate cuts we saw in the fourth quarter of 2025 were exactly that, a recalibration as inflation cooled. Now, the market is pricing in a pause, with Fed fund futures suggesting only a 30% chance of a cut before June.Inflation And Market Positioning
The inflation picture supports this cautious stance, which should keep volatility elevated in interest rate swaps. While the year-over-year CPI dropped significantly through 2025, the most recent February 2026 data showed a sticky 2.8% headline number, driven by services. This persistent inflation, above the Fed’s 2% target, is capping the upside for front-month bond futures. The underlying economy remains on solid footing, just as we were told to expect back in 2025. Fourth-quarter 2025 GDP grew at 2.3%, and with the February 2026 unemployment rate holding at a low 3.7%, there’s no pressure on the Fed to cut from a weakening labor market. This strength suggests options strategies that bet on a stable range for equity indices like the S&P 500, rather than a sharp directional move, could be profitable. However, external risks that were downplayed a year ago are now in focus. Renewed tensions in the Strait of Hormuz have pushed Brent crude above $90, creating a headache for the Fed’s inflation fight and making long calls on energy ETFs an interesting hedge. This reintroduces the risk of supply-side inflation that the tariff-related pressures of 2025 were supposed to leave behind. Create your live VT Markets account and start trading now.
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