Tariffs lead to a one-time increase in prices, which central banks often overlook. Although tariffs do have some effect, this impact is usually small and short-lived. Waller believes that current high interest rates can be reduced. He mentions that unemployment is at its normal level and suggests a possible rate cut in July, emphasizing that this decision is not influenced by political factors.

Waller’s View on Rate Cuts

After the FOMC meeting on June 20, Waller showed openness to a rate cut in the Fed’s next meeting. He argued that the bank should not wait for job market downturns before making changes. He pointed out signs of strain, like rising unemployment among new graduates. Waller downplays the inflationary effects of tariffs, calling them a temporary concern. He argues that even a 10% tariff on all imports would not notably raise overall inflation. While he supports a July rate cut, he is unsure if the whole committee will agree. He clearly states that trade restrictions may cause initial price increases, but these effects typically don’t last long enough to change monetary policy. Waller believes that new tariffs won’t significantly reignite inflation, and any early spikes will be temporary. This indicates we shouldn’t rush to hedge against long-term pricing pressure due solely to tariff discussions. More intriguing is Waller’s shift toward easing. He argues that current borrowing costs are already high enough and that there is room to lower them. He cites two clear points: the economy isn’t overheating, and the unemployment rate has stabilized. This is crucial because if employment has peaked, keeping rates high for too long might unnecessarily hinder hiring.

Market Positioning Insights

The labor market isn’t shrinking, but it shows subtle signs of loosening. New graduates, for instance, are having a tougher time finding jobs after university. This is an early indicator we monitor closely, as it often appears before broader measures like overall unemployment signal trouble. When a Fed member with a strong data focus discusses cutting rates regardless of political cycles, it suggests potential upcoming changes. He prefers to act before job losses increase, indicating a proactive stance instead of a reactive one. For those managing derivatives, this means reevaluating how we model interest rate paths for the latter half of the year. If the committee votes to lower rates in July, it could signal the start of ongoing changes. Whether this is a one-time adjustment or part of a series will depend on upcoming data, such as job statistics, wage growth, and consumer spending. Typically, when someone like Waller supports a near-term cut, we see quick adjustments in expectations. We should also closely observe differences among policymakers. If one member leans toward easing while others are hesitant, it reflects some uncertainty. This indecision may cause short-term swap markets to be unstable, creating opportunities for tactical positioning. Those trading rates or volatility products should monitor the gap between expected and actual volatility around Fed dates for opportunities leading up to the July decision. This isn’t a shift prompted by fears of a recession; it’s a risk management strategy. Waller isn’t predicting a downturn but believes it’s wise to take action before one occurs. This nuance matters when adjusting future rate bets or examining options. Additionally, steepener positions could become more appealing if easing starts gradually and expectations for future cuts build throughout the year. In summary, those in favor of loosening policy are becoming more confident, even if they don’t form a majority yet. This opens up more opportunities for positioning around possible action in July. Stay flexible as we look beyond the immediate rate meeting. Create your live VT Markets account and start trading now.

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