Federal Reserve Governor Waller highlights that while job market numbers look decent, they could easily become unstable. Business leaders say they are neither hiring nor firing, indicating a sense of stability, but also underlying worries. Discussions on monetary policy are lively, focusing on economics rather than politics. Waller advises caution when opposing interest rate decisions, suggesting that rate cuts can happen anytime, although there’s no strong reason to wait.

Impact Of Tariffs On Inflation

Tariffs act like a tax, spreading costs among various groups. The short-term effects of tariffs on inflation should be looked at over three to six months. While some costs may reach consumers, they likely won’t cause long-term inflation unless tariffs continue. Waller wants to prevent a sharp economic decline and mentions that long-term inflation expectations are stable. He stresses the need for credibility to keep inflation expectations in check. Recently, Waller, known for being more lenient, indicates possible rate cuts or concerns about risks. However, his influence is less significant than before. He might be the only one against rate decisions at the July meeting, alongside Bowman, due to their softer views.

Market Reaction And Economic Slowdown

From the Governor’s comments, we think the market undervalues the risk of a near-term economic slowdown. His worry that the job market could easily “tip” suggests we should prepare for a downturn. We are looking at buying put options on major indices that expire after the upcoming job reports. The focus on the delicate state of the private sector is clear, even with positive headline numbers. Recent JOLTS data shows job openings have dropped to 8.059 million, the lowest since early 2021, supporting his cautious viewpoint. This strengthens our belief that our investments should lean towards potential economic weakening. His comments about rate cuts reflect a strong reliance on data, which creates uncertainty heading into the July meeting. The market currently expects about an 85% chance of a rate cut by September, according to the CME FedWatch Tool. Any unexpectedly weak data may shift those expectations much sooner. As a result, trading in short-term options or straddles on interest rate futures could be a good way to navigate this rising volatility. Internal disagreements within the central bank, especially between a practical member like Waller and a more hawkish member like Bowman, add to the unpredictability. This healthy debate indicates less certainty in policy, and we should avoid being too committed to one outcome. Our approach is to stay adaptable, using derivatives to express our views instead of taking large direct positions. Waller’s view of tariffs as a temporary tax rather than a cause of ongoing inflation is crucial for our inflation expectations. With the latest annual core PCE inflation rate down to 2.6%, the central bank has more flexibility to respond to growth concerns than the market realizes. Therefore, we are cautious about betting on rising inflation and are instead positioning ourselves for falling yields if growth data weakens. Create your live VT Markets account and start trading now.

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