Federal Reserve Governor Christopher Waller supports a rate cut, echoing President Trump’s desire for more relaxed monetary policy. He suggested a 25 basis point cut during the FOMC meeting on July 29–30 and is open to more cuts later this year if inflation remains stable. This view differs from other Fed officials who warn that new tariffs could lead to long-term inflation and see further cuts as potentially risky. Waller believes trade barriers might only cause temporary price changes instead of ongoing inflation and emphasizes the importance of being aware of a potential slowdown in growth.

Fed in Blackout

With the Fed in a blackout period before the July meeting, Waller’s comments stand out amidst disagreements within the Fed and pressure from the White House on Powell. Although Trump has recently reduced direct threats against Powell, the Fed Chair remains under political scrutiny. Given Waller’s statements, we think traders should prepare for a more dovish monetary policy. The likelihood of lower short-term interest rates is increasing, making interest rate futures that bet on a July cut more appealing. This aligns with Waller’s clear call for policy easing this month. The market is already showing this sentiment. According to the CME FedWatch Tool, traders currently see over a 90% chance of a 25 basis point cut at the upcoming Federal Open Market Committee meeting. If the central bank fails to meet these expectations, a significant market shift is likely. For equity traders, this positive outlook supports a bullish strategy on stock index derivatives, especially in growth sectors sensitive to borrowing. We recommend buying call options or setting up bull call spreads on indices like the Nasdaq 100 in anticipation of the late July decision. The indication of possible further easing this year provides additional support for this strategy.

Inflation Concerns and Market Impact

Waller’s dismissal of inflation worries seems valid based on recent data, which lowers the chances of an unexpected hawkish stance. The latest Personal Consumption Expenditures (PCE) price index, the Fed’s preferred measure, showed a 2.6% year-over-year increase in May 2024, continuing a trend of modest cooling. This suggests that price pressures are controlled enough to allow for a policy change. We also expect a weaker U.S. dollar, so traders should adjust their positions accordingly. They could short the dollar using futures contracts or buy put options on dollar-tracking ETFs like UUP. A rate cut would reduce the yield advantage of holding dollars. However, the noted internal divisions hint at potential volatility as the meeting approaches. Historical data from past rate cuts in 2007 and 2019 illustrates that the period following an initial cut can be turbulent as markets evaluate the economic weaknesses that led to the decision. Therefore, acquiring some downside protection or volatility-linked products like VIX options might be a wise safeguard. Create your live VT Markets account and start trading now.

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