US Treasury Secretary Bessent is unsure if Putin will agree to a ceasefire. Bessent also mentioned new arms agreements that Putin suggested earlier. In his remarks about monetary policy, Bessent clarified that he doesn’t control the Federal Reserve’s actions. He believes the Fed might start with a 25 basis point cut, which could ramp up to a 50 basis point reduction. There’s potential for more rate cuts beyond that.

The Need for Rational Decisions

Bessent stressed the importance of having a Fed chair who can make sensible decisions. Current models suggest that the neutral rate may be lower than we previously thought. We might soon see the Fed begin a series of interest rate cuts. The discussion is now whether the first cut will be 25 or a more aggressive 50 basis points. This is backed by new models indicating a lower neutral rate. The July Consumer Price Index report shows that inflation has dropped to 2.8%, strengthening the case for easing policy. The economy is also slowing down, with second-quarter GDP growth at just 1.5%. This gives the Fed a chance to cut rates from the current 5.50% level. However, we need to consider the geopolitical risks involving the ceasefire and possible arms agreements. The uncertainty means we can expect sudden market swings and higher volatility. The CBOE Volatility Index (VIX) is currently high, around 19, showing this nervousness.

Positioning in Financial Markets

For derivative traders, this situation suggests preparing for lower interest rates in the coming months. Options on Secured Overnight Financing Rate (SOFR) futures can be used to bet on the timing and extent of the Fed’s cuts. There’s increased activity in contracts set for the fourth quarter of 2025, anticipating multiple cuts by year-end. In the equities market, a split strategy may develop. Long-dated call options on major indices like the S&P 500 might be appealing for those looking to capitalize on the long-term trend of easing financial conditions. In contrast, holding short-term put options could provide a valuable hedge against any unexpected negative geopolitical news. This scenario feels reminiscent of the “mid-cycle adjustment” we experienced in 2019. During that time, the Fed made three rate cuts in response to slowing global growth and trade war concerns, even without a recession. History shows that the central bank is likely to act proactively when faced with genuine threats to economic expansion. Create your live VT Markets account and start trading now.

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