The US President has shared his thoughts on interest rates, saying the Federal Reserve is often slow to make changes. He highlighted the stock market’s current success, calling it the best ever. He pointed out that inflation has dropped, while the stock market has grown. He supports further reductions in interest rates to boost economic growth.

Impact of Rate Cuts

Wednesday’s rate cut may help achieve some of his goals, but it’s unclear if long-term rates will also decline. The discussion about interest rates and their effects is ongoing. With the President’s comments stirring up the market, the VIX index has risen to 19 ahead of next Wednesday’s Fed meeting. The most recent Consumer Price Index from August 2025 showed inflation at 2.8%. While this is an improvement, it remains above the Fed’s target. We’ve seen similar situations before, particularly in 2019, when political pressure on the Fed caused market fluctuations. The upcoming Fed decision makes short-term volatility interesting. We should consider buying options straddles on the SPX, which is near its all-time highs, to take advantage of any sharp moves, regardless of the direction. The real concern is not just the anticipated rate cut, but whether the Fed will signal more cuts or view it as a “one and done.” This could easily cause the market to swing by 2% or more.

Trading Strategies in a Volatile Market

Monitoring the Treasury market is crucial, as a rate cut might not lead to lower long-term rates. The current 10-year yield is at 4.1%. If the market sees this cut as a mistake regarding inflation, that yield might increase. This scenario suggests a potential yield curve steepening trade, where futures could be used to bet on the widening spread between 2-year and 10-year notes. This environment also offers specific sector opportunities. Financial stocks, especially regional banks, are affected by the yield curve. Therefore, put options on an ETF like KRE could serve as a hedge if long-term rates decline and affect net interest margins. Conversely, if the market interprets the cut as a boost for growth, call options on rate-sensitive tech stocks could do well. Create your live VT Markets account and start trading now.

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