Federal Reserve Bank of Chicago President Austan Goolsbee addressed a Q&A session at an mHub Industry Disruptor Series event in Chicago. He mentioned potential deterioration in the labour market and a possible resurgence of inflation.<\/p>\n
Goolsbee expressed uncertainty, suggesting a wait-and-see approach. He emphasised that interest rates are more indicative of the labour market’s health than just job growth numbers.<\/p>\n
The impact of tariffs on prices varies by sector, according to Goolsbee. Although the market expects a rate cut by the Federal Reserve in September, his comments reflect a more cautious stance.<\/p>\n
Given the cautious tone from the Chicago Fed President, we should reconsider the market’s high confidence in a September rate cut. As of this morning, September 4, 2025, the CME FedWatch Tool is still pricing in a nearly 70% chance of a cut at the September 18th meeting. This creates a significant gap between official sentiment and market pricing, which presents an opportunity for traders.<\/p>\n
The concern over inflation picking back up is not unfounded, as we saw in the last CPI report for July 2025. That report showed core inflation re-accelerating slightly to 3.1% year-over-year, breaking a steady downward trend we had enjoyed for months. If the August CPI data, due next week, shows a similar pattern, the Federal Reserve will have a strong reason to hold rates steady.<\/p>\n
Similarly, the focus on the labor market’s underlying health over raw job numbers is critical. While the August jobs report released last week showed a respectable 195,000 jobs added, the unemployment rate ticked up to 4.2% for the second consecutive month. This subtle weakening supports the view that the Fed might pause to see if a more serious deterioration is underway.<\/p>\n
In response, we should look at purchasing volatility ahead of the FOMC meeting. Buying options, such as at-the-money straddles on the SPY or QQQ ETFs, could profit from a large market move in either direction if the Fed surprises the market. The VIX index, currently hovering near a low of 14, seems underpriced for the level of uncertainty being expressed by policymakers.<\/p>\n
We should also consider positions that bet against a rate cut. This could involve using options on SOFR futures or shorting 2-Year Treasury note futures, as these are most sensitive to near-term Fed policy. If the Fed holds rates steady, these positions would become profitable as the market rapidly reprices its expectations.<\/p>\n
We must remember the policy mistakes of 2022, when the Fed was seen as being behind the curve on inflation. That experience has likely made the current committee more reluctant to cut rates pre-emptively, especially at the first sign of inflation re-accelerating. Therefore, the risk of a hawkish surprise this month feels much higher than the market is currently admitting.<\/p>\n
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