Traders are heavily betting on a Fed rate cut next month due to inflation data and tariffs.

    by VT Markets
    /
    Aug 13, 2025
    The latest US Consumer Price Index (CPI) report met expectations, showing that tariffs have had a small impact on inflation. Although tariffs have influenced prices, the effect is smaller than expected, even months after they were first implemented. As a result, traders are almost all on the same page, with about 98% predicting a 25 basis point rate cut in the next month, up from about 89% before the inflation data was released. They are also forecasting about 60 basis points of rate cuts for the year, which is a slight increase from the previous estimate of 57 basis points. Traders were already looking for a rate cut due to weak US job data, and this data reinforces that anticipation for September.

    Divergent Views Among Policymakers

    There are differing opinions among Federal Reserve (Fed) policymakers about rate cuts. Kansas City Fed president Schmid opposes a cut in September despite the inflation figures. Meanwhile, Richmond Fed president Barkin has taken a neutral stance, mentioning the unclear balance between inflation and unemployment. The Fed’s decisions are becoming more politicized, with some members influenced by political appointments. The upcoming Fed meeting on September 17 coincides with several economic events, such as the Jackson Hole symposium and CPI reports. This timing offers little chance for policymakers to shape market opinions, especially with UBS and Goldman Sachs noting potential rising price pressures. With the market now seeing a 98% chance of a rate cut next month, the straightforward trade has already occurred. A similar situation happened in 2024 when the market acted ahead of the Fed, delaying actual cuts. The real opportunity now lies in trading against the consensus, not simply following the trend. Since pricing is almost certain, there’s a chance to buy cheap protection against a hawkish surprise from the Fed at Jackson Hole this month. Out-of-the-money puts on Treasury futures or calls on the VIX could yield significant gains if policymakers push back against market expectations.

    Opportunities in the Yield Curve

    The most direct way to bet on the rate cut is through the yield curve. We can set up a steepener trade that profits if short-term rates drop more than long-term rates. This can be achieved by buying 2-year note futures (/ZT) while selling 10-year note futures (/ZN). This position benefits not only from the cut but also if concerns about future inflation push long-term yields higher. For equities, a rate cut due to economic weakness—such as the recent report showing only a gain of 95,000 jobs—doesn’t signal a clear go-ahead to invest heavily. While sectors sensitive to rates, like technology and real estate, may see a boost, we should employ defined-risk strategies like call spreads. This strategy allows us to benefit from potential gains while limiting our risk if the weak economy negatively impacts earnings. We should be cautious about dissenting views from voting members like Schmid and warnings from banks about future inflation. The next CPI report on September 11 will be released during the Fed’s blackout period, meaning they cannot comment on the market’s response. If this report shows higher inflation, it could lead to significant market volatility and quickly reverse the current dovish outlook. Create your live VT Markets account and start trading now.

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