This week, all eyes are on the Federal Reserve meeting on Wednesday, where we expect some updates. The average forecast for 2025 suggests two rate cuts may still be on the table, and the 2026 prediction could be lowered by 25 basis points.

Countering Expectations

Chair Powell is likely to push back against market hopes for softer policies. He may stress that future decisions will rely on economic data. This could temporarily strengthen the dollar, even with weak labor and inflation numbers. The Fed meeting on Wednesday is crucial, and we think the market has overly optimistic expectations for rate cuts this year. Currently, the futures market estimates a 65% chance of a rate cut by December, which may lead to disappointment. We believe Chair Powell will highlight that any decisions depend on new data, countering bets on cuts in October or December. For traders focused on interest rates, this means the short end of the yield curve might need to be adjusted. Strategies that anticipate no immediate rate cuts, like selling December SOFR futures, could be effective if Powell’s stance is strong. This approach would benefit as the market shifts its outlook for a more patient Federal Reserve. Powell has reason to wait because the data doesn’t urgently call for cuts. The last Consumer Price Index report from August 2025 showed inflation at 2.9%. While it’s slowly decreasing, it’s still above the target of 2%. The latest jobs report revealed an increase of 190,000 jobs, showing the labor market is softening, but not collapsing.

Market Implications

If the prospect of lower rates gets pushed back, it might create challenges for stocks. With the VIX volatility index around 17, it’s wise to buy some near-term protection using S&P 500 put options. This hedge could be beneficial if the market dips after Wednesday’s cautious message. We’ve seen similar behavior before, especially in late 2023 and early 2024. During that time, the market consistently anticipated quicker rate cuts than the Fed was ready for. Each time Powell disagreed, it led to quick adjustments in bond yields and strengthened the dollar. As a result, a patient Fed should keep the U.S. dollar strong against other currencies. If this week’s message is indeed “higher for longer,” call options on the dollar index (DXY) might be worth considering. This perspective is supported by the fact that other major central banks seem closer to easing their policies than the Fed. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now