Williams from the Federal Reserve expects the effects of tariffs to last until about mid-next year. He mentions that the bond market is currently paying more attention to economic fundamentals. The bond market is staying calm. The Federal Reserve’s goal is to keep the economy stable and manage the impact of tariffs.

Core Inflation Expectations

Williams believes tariffs will likely stay in place but is open to change. Tariffs have caused an increase in core goods inflation. The long-term effects of tariffs are expected to be a major economic issue into mid-2026. Recent data shows this trend: the August 2025 Consumer Price Index (CPI) report revealed core goods inflation rose to 3.1%, up from 2.5% in the spring. This rising price pressure will likely shape the economy for the next several quarters. Despite these inflation signals, the bond market remains calm, indicating a focus on broader growth fundamentals. The MOVE index, which measures Treasury market volatility, is currently around 85, a low level not seen since the start of trade disputes earlier this year. This calmness in the bond market may be a chance, as it appears to be underestimating the risks of a policy change. The Federal Reserve is currently allowing inflation to affect the economy, but this approach may not last. Fed funds futures suggest only a 20% chance of a rate hike by December 2025, which seems low given the rising inflation. We should prepare for a possible shift towards a more aggressive stance from the central bank if price pressures continue.

Preparing for Market Volatility

We experienced a similar situation in 2022 when initial ‘transitory’ inflation forced the Fed into a much faster rate hike than the market expected. This historical lesson shows that the Fed’s patience has limits. We should use this experience to guide our strategy, as the market could be surprised again. In the upcoming weeks, we should consider buying derivatives that will benefit from increased volatility and unexpected interest rate changes. This could mean purchasing options on SOFR futures to bet on a steeper rate increase or using VIX calls to protect against a drop in the stock market. Exploring sector-specific strategies aimed at industries facing high import costs, like retail and manufacturing, also looks promising. Create your live VT Markets account and start trading now.

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