Christopher Waller, a Federal Reserve official, spoke at Auburn University in Alabama on Friday about the economic outlook and monetary policy. He said the job market break-even rate is now probably around zero.
He said an unresolved, longer Middle East war raises risks to inflation and jobs. He also said markets seemed to have undervalued the risk of a prolonged conflict.
Inflation Risks And Policy Implications
Waller said he will closely watch jobs data for growing signs of stress. He added that recent changes in the job market make it hard to analyse current conditions.
He said periods of negative job growth might not mean a recession. He also said that after a series of shocks, it becomes harder to look through an inflation jump.
He said a quick resolution to the war would make it easier to look through an energy price shock. He also said he will closely observe how inflation expectations respond to the conflict.
He warned that a potential energy price surge could have a lasting impact on inflation. He said March headline PCE inflation is likely to reach 3.5% year on year.
Market Positioning And Risk Management
We are seeing signs that the Fed will find it harder to look past the recent jump in inflation. With March headline PCE inflation now expected to hit 3.5%, this view is supported by the latest CPI data which registered a 3.7% year-over-year increase. This makes near-term interest rate cuts look increasingly unlikely for derivative traders betting on Fed policy.
We must closely watch jobs data for growing signs of stress, especially since the break-even rate for job creation is now probably around zero. The last payroll report showed a gain of only 85,000 jobs, a clear slowdown from the more robust growth we saw through most of 2025. This makes it challenging to interpret market reactions, as periods of negative job growth might not automatically trigger a policy change if inflation remains high.
Markets appear to have undervalued the risk of a prolonged conflict in the Middle East, which increases the potential for sudden energy price surges. We’ve already seen Brent crude jump to $95 a barrel this month, and this suggests buying protection or using options strategies could be wise. The CBOE Volatility Index, or VIX, climbing to 21 supports the idea of preparing for wider market swings in the coming weeks.
Given this outlook, positions that benefit from sustained high interest rates should be considered, much like the environment we navigated back in 2023. This could involve using options on short-term rate futures to bet against imminent Fed cuts. In the energy sector, the upside risk to inflation suggests that call options on crude oil and related equities offer a direct way to hedge against further geopolitical shocks.
