The Federal Reserve has decided to lower the Federal Funds Target Range to 3.50%–3.75% after its December meeting. This move comes after a gradual slowdown in the job market and addresses the ongoing issue of high inflation. Fed Chair Jerome Powell noted broad support for this decision during his press conference, stating that the economy does not currently feel too strong. The Federal Open Market Committee (FOMC) indicated a pause in interest rate cuts due to concerns about high inflation and moderate economic growth. As a result, the US Dollar weakened slightly against major currencies like the Euro and Japanese Yen. The Fed’s statement included plans to begin buying treasury bills to manage reserves.

Summary of Economic Projections

The Fed’s Summary of Economic Projections outlined various policy forecasts, expecting a federal funds rate of 3.6% by the end of 2025. They anticipate a 25 basis points rate cut in both 2026 and 2027, with unemployment expected to rise to 4.4% by 2026. These projections show varying opinions on what the appropriate interest rate paths should be in the coming years, influencing USD behavior against other currencies. Market participants are focused on the Fed’s interest rate announcement from December. Differing views within the Fed committee have led to expectations of a 25 basis point cut. This comes as growth and inflation projections change, keeping attention on Chair Powell’s comments, especially regarding inflation and the labor market. The Fed’s decision to cut rates was anticipated, but the shift in focus towards the labor market is noteworthy. Though the official statement mentions “extent and timing” to imply a pause, the press conference conveys a different message. The Fed now seems more concerned about rising unemployment than about inflation, which will guide our strategy in the coming weeks. We need to closely watch employment data, as it is now the main driver of policy. Last week, jobless claims increased to 230,000, supporting the Fed’s view of a cooling market. The November 2025 payroll report showed only a 150,000-job gain, with prior months revised downward, reinforcing Powell’s comment that job growth has been overestimated.

Market Volatility and Employment Data

This heavy focus on incoming data suggests we should prepare for significant market volatility around future employment reports. The latest JOLTS report from October 2025 showed job openings fell to 8.5 million, indicating a loosening labor market. We might consider using options to trade this uncertainty, as a sharp move in the VIX, which is currently around 16, is likely with the next major data release. The Fed essentially tells us to look past the current inflation rates. Despite the last Core CPI reading from November 2025 showing a 3.8% annual rate, Powell emphasized that tariffs are muddling the picture and that the underlying trend is under control. If faced with a weak labor market versus inflation slightly above 2%, the Fed will prioritize job support. This situation is bearish for the US Dollar, as seen with the DXY index dropping below 99.00. A central bank focused on employment risks rather than inflation will exert downward pressure on its currency. We should consider buying call options on currency pairs like EUR/USD and AUD/USD to prepare for further dollar weakness with defined risk. The drop in Treasury yields indicates that the bond market is anticipating this dovish approach. We can use interest rate futures to bet on the possibility of the Fed cutting rates more aggressively in 2026 than currently projected. The main risk to this view would be a sudden change in employment data, but for now, the trend suggests positioning for lower rates. Create your live VT Markets account and start trading now.

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