Current Policy Perspectives
Musalem indicated that the current policy is appropriate for tackling inflation in a full-employment economy but might require changes if job market risks intensify. He stated that his choice will rely on fresh data until the meeting, particularly including August’s employment report.
Contrasting with Fed Chair Powell’s earlier suggestion that a cut might be justified as tariff-related inflation diminishes and labour risks rise, Musalem’s remarks highlighted hesitation among some policymakers to ease given inflation above target. The FOMC is set to reconvene on September 16-17.
With the September 16-17 FOMC meeting just weeks away, we are seeing a clear split in opinion within the Federal Reserve. This difference between a cautious stance and a more dovish one creates significant uncertainty for the market. As a result, the upcoming August jobs report is now the single most important catalyst for our short-term interest rate expectations.
The data supports this cautious view, making a September rate cut less of a certainty than some might think. The last core CPI reading for July 2025 came in at 2.8%, validating the concern that inflation remains stubbornly above the 2% target. Furthermore, with the July jobs report showing a healthy gain of 195,000 jobs and unemployment at a low 3.7%, the argument for an imminent cut to support the labor market is weak.
Strategic Investment Considerations
Given this data-dependent environment, we should anticipate a rise in market volatility. The VIX index, currently hovering near 14, seems low considering the potential for a market-moving surprise at the next meeting. We could look at purchasing options, such as straddles or strangles, on major indices to profit from a large price swing in either direction following the jobs data or the Fed’s decision.
For those wanting to place a directional bet, Fed Funds futures are pricing in roughly a 60% chance of a 25-basis point cut in September. A strong jobs report in early September would likely cause that probability to fall sharply, presenting an opportunity to short those contracts. Conversely, a surprisingly weak report would solidify the case for a cut and send them higher.
