UBS expects the Federal Reserve to cut interest rates four times in a row, starting in September, totaling 100 basis points. This prediction is based on inflation staying low and growing risks in the job market. UBS believes the Fed will use its upcoming policy meetings to start these rate cuts because inflation is cooling and job demand is decreasing. In July, core inflation was 2.9% year-on-year, while headline inflation remained at 2.6%. Price pressures seem under control. Lower energy prices and steady goods inflation are helping balance out rising service costs. UBS predicts that unemployment rates will rise above the natural rate by the end of the year and will stay high through 2027. Fed officials, including Chair Jerome Powell, have become more supportive of rate cuts. During the July meeting, two members voted for a cut, and Vice Chair Williams and Governor Waller have indicated they are open to a cut in September. UBS concludes that since inflation is close to the target and employment issues are growing, the Fed is likely to start easing at its next meeting. Rate cuts are expected in four upcoming meetings, scheduled for late 2025 and early 2026. With the Federal Reserve’s meeting on September 17th just over two weeks away, markets are already preparing for the easing cycle. The CME FedWatch Tool shows an 85% chance of a 25-basis-point cut this month. This suggests a strategy for trading based on falling interest rates, such as buying options on Secured Overnight Financing Rate (SOFR) futures. This expectation is impacting Treasury yields, with the 10-year note around 3.8%. If the Fed goes ahead with the cuts, yields may drop further, leading to higher bond prices. This scenario is similar to what happened in 2019, when a Fed pivot caused a strong rally in Treasury futures. A weaker dollar is likely if rate cuts continue, making non-U.S. currencies more appealing. The euro, currently about 1.0900 against the dollar, is expected to strengthen. We suggest buying long EUR/USD call options to target a move toward 1.1100 in the coming months. For equity markets, this shift toward dovish policies is beneficial since lower borrowing costs can boost corporate earnings and investments. The S&P 500 is currently near 5,600 and could gain more momentum if the Fed signals clear easing plans. Buying call options or long futures contracts on major stock indices seems promising in the weeks ahead. Lastly, watch for volatility leading up to the September meeting. The VIX is currently at a moderate 16, but we expect implied volatility to increase as traders speculate on the Fed’s decision. This could create a short-term trading opportunity with VIX futures or options that profit from the uncertainty before the announcement.

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