Federal Reserve Governor Waller has shared plans to lower interest rates toward a neutral level, although it’s unclear when this will happen. He pointed out that there is no fixed timeline for these rate cuts to begin. Waller discussed tariffs, calling them a type of tax and suggesting that taxes do not automatically lead to inflation. While he recognized the high level of US debt, he does not see it as an immediate crisis, believing it can be addressed in future years.

Temporary Inflation

He described inflation as a temporary problem. Waller’s opinions may be influenced by a desire to be in line with former President Trump, perhaps with hopes of becoming the next Fed Chair. With a major Federal Reserve official hinting that interest rate cuts are on the way, we can expect a positive response in fixed-income markets. Traders might consider buying Treasury futures because bond prices typically rise when the Fed starts to ease its policies. The latest Core PCE report for July 2025 showed inflation easing to 2.5%, which supports the idea of starting the rate cuts. This hopeful outlook could boost the stock market, which has faced uncertainty since the interest rate hikes of 2022-2024. This is a good time to buy call options on major indices like the S&P 500. This sentiment is backed by the latest jobs report, showing a steady but non-inflationary payroll increase of 160,000, indicating a stable economy that can sustain corporate profits. The reduction in uncertainty around policy should help lower market volatility. The VIX index has been around 15, and we think it could drop further as the Fed’s direction becomes clearer. This situation is beneficial for strategies that gain from falling volatility, like selling VIX futures or setting up put spreads on volatility ETFs.

Weakening US Dollar

The Fed’s clear intention to cut rates will likely weaken the US dollar against other major currencies. We see a chance to short the Dollar Index (DXY), which seems to be peaking. A direct way to do this would be through currency futures or by purchasing call options on pairs like the EUR/USD, especially as other central banks appear more cautious about easing their policies. The Fed’s view of inflation as “transitory” suggests that it will allow slight price increases without changing its easing stance. While it’s noted that US debt is on an unsustainable path—predicted to surpass 108% of GDP this year—this issue is being framed as one for the future. This gives us confidence that long-term fiscal concerns won’t hinder the market’s positive response to lower rates in the coming weeks. Create your live VT Markets account and start trading now.

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