A report from the Wall Street Journal suggests a slow in job growth this summer. This slow growth could lead the Federal Reserve to lower interest rates by 25 basis points in an upcoming meeting.
The possibility of a 50 basis point cut seems less likely, with market expectations for such a move sitting at just 14%. The recent jobs report adds uncertainty to the future rate cut pace beyond September.
Fed’s Upcoming Rate Decisions
The jobs report from this morning makes a quarter-point rate cut at the Fed’s meeting in two weeks a near certainty. We’ve seen the market react quickly, with probabilities for a 25 bps cut, as tracked by the CME’s FedWatch Tool, jumping to over 95% from around 70% yesterday. This removes most of the guesswork for the September decision, allowing traders to price this into short-term interest rate futures with high confidence.
A small part of the market, now pricing a 14% chance of a 50 basis point cut, is betting on a more aggressive move. While this is an outside possibility, it creates an opportunity for those using options to bet on a larger-than-expected policy shift. We remember how quickly the Fed accelerated its actions back in the 2022 hiking cycle, so paying attention to these low-probability outcomes can be profitable.
The real focus for us now shifts to the path of cuts *after* September, which this report makes less clear. With job growth now averaging just 150,000 over the last three months, a significant drop from the 250,000 average we saw earlier in the year, the economic slowdown is evident. However, with core inflation still stubbornly above 3%, the Fed will be hesitant to signal a rapid series of cuts.
Market Volatility and Currency Implications
This uncertainty is a clear signal to look at volatility-based trades. With the VIX index sitting near 14, which is low compared to its historical average of around 20, buying protection or making bets on wider market swings could be undervalued. Strategies using options on equity indices or interest rate futures could perform well as the debate over the pace of future cuts intensifies heading into the fourth quarter.
We should also anticipate renewed pressure on the US dollar as the Fed begins what looks like an easing cycle. A confirmed cut in September, combined with the prospect of more to follow, likely puts a ceiling on the Dollar Index (DXY). This suggests positioning for dollar weakness against currencies whose central banks are not yet in a position to cut rates.
