The Federal Reserve has updated its forecasts, showing lower expected federal funds rates. For 2025, the rate is now predicted to be 3.675%, down from 3.875%. In 2026, it is expected to drop to 3.375%, reduced from 3.625%. By 2028, the rate will stay steady at 3.125%.

Market Analysis

Recent market analysis shows a decrease of 47 basis points this year, compared to earlier estimates of 41.9. By July, a further easing of 108 basis points is now expected, up from 100. Inflation rates are forecasted to remain stable, with Personal Consumption Expenditures (PCE) headline inflation at 3.0% for 2025. By 2028, inflation is expected to stabilize at 2.0%. GDP growth rates have been revised upward, with 2025 now estimated at 1.6%, up from 1.4%. The 2028 growth rate is projected to hold steady at 1.8%. Unemployment rates are expected to gradually decrease, with a forecast of 4.5% for 2025, dropping to 4.2% by 2028. The Fed is optimistic about future job conditions, despite ongoing challenges. The Federal Reserve’s updated forecast suggests a more lenient approach, calling for two additional rate cuts in 2025 compared to earlier predictions. Markets are reacting, anticipating 108 basis points of easing by next July. This trend indicates we should prepare for lower interest rates ahead. Given this outlook, we might consider investing in interest rate futures linked to SOFR, which will appreciate in value as rate cuts become more likely. The CME FedWatch tool suggests nearly certain odds of at least one 25 basis point cut by the end of the year. This strong market consensus indicates it’s wise to hold positions that benefit from lower rates.

Opportunities For Equities

This dovish shift, along with the updated GDP growth forecast of 1.6% for 2025, is a good sign for equities. We can act on this by buying call options on major indices like the S&P 500. With the Fed indicating support for the economy, implied volatility should decrease, making this an ideal time for trades that benefit from a declining VIX. We should, however, keep a close eye on the labor market, as the Fed predicts unemployment to remain at 4.5%. Looking at past cycles, especially before the 2008 recession, we know that when unemployment rises significantly, it often doesn’t reverse easily. The most recent August jobs report shows unemployment at that 4.5% mark, so any further weakness could swiftly change market sentiment. Lastly, the expectation of lower US interest rates is likely to weigh on the dollar. Therefore, shorting the US Dollar Index (DXY) may be a strong strategy, especially as other central banks like the ECB may not act as quickly to cut rates. Additionally, we could consider going long on futures contracts in currencies like the euro or Swiss franc against the dollar. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now