The market expects 25 basis point rate cuts in each of the next three FOMC meetings. However, the main focus is on the September 17 meeting, which has about a 10% chance of seeing a 50 basis point cut. Such a cut would need a surprisingly low Consumer Price Index (CPI) number, and that report is coming soon. Recently, the President spoke about the Producer Price Index (PPI), restating his call for rate cuts. This follows his comments last month when PPI rose by 0.9% from the previous month.

The Challenge of Appointment

Even though the President has criticized the current Chair, he appointed him. Finding a new Chair might be difficult. The political chatter is increasing, but our main focus should be on the CPI data tomorrow and the Fed meeting on September 17. The market has already factored in a 25 basis point cut as the most likely outcome. This means the real trading chances lie in preparing for a surprise instead of the expected result. That small 10% chance of a 50 basis point cut presents the biggest opportunity, betting directly on lower inflation numbers. We’ve seen the VIX rise from a low of 13 last month to nearly 18, indicating that traders are buying protection ahead of the data release. Purchasing cheap, out-of-the-money call options on bond ETFs or even Fed Funds futures is a straightforward way to bet on a dovish surprise from the Fed. The last CPI reading in August was still sticky at 3.3%, which raises uncertainty and makes volatility a tradable asset. Options pricing, especially for contracts expiring right after the September 17 meeting, shows a higher premium because of this event risk. We are considering straddles or VIX call options to make a profit from significant market movements, no matter the direction.

Preparing for the Fed’s Decision

We should also be ready for Powell to resist the pressure, especially if the CPI does not indicate significant cooling. We recall the market’s sharp fall in late 2018 when the Fed maintained its course despite similar political challenges. Having a small position in put options on major indices can serve as a useful hedge if the Fed chooses to assert its independence and disappoint the market. Create your live VT Markets account and start trading now.

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