The Atlanta Federal Reserve President, Rafael Bostic, anticipates a continued slowdown in the economy, with growing uncertainty about its impact on jobs and inflation. Firms are in a wait-and-see mode regarding employment, and price pressures are expected to persist for the next six to twelve months, challenging the Federal Reserve.
Policymakers face uncertainty over whether tariffs will cause a temporary or lasting price shift. The extended nature of tariffs complicates understanding their effects. Businesses are adopting various strategies to adjust prices and may continue doing so into the next year, with the economy’s fundamentals remaining solid.
Impact Of Lower Income
Lower-income consumers face increased stress as pandemic-induced savings deplete. Despite this, no dramatic slowdown has been observed in the southeastern labour market. The July jobs report has caused a reassessment of the Federal Reserve’s employment mandate effectiveness.
Bostic mentions tariffs, aimed at structural change, could lead to enduring impacts, and federal debt may affect liquidity, demanding attention from the Federal Reserve. Despite substantial balance sheet reductions, one rate cut for this year seems appropriate, pending further data. The labour market risks remain higher than previously thought, though price pressures may ease by mid to late next year.
We are seeing a clear divide at the Federal Reserve between officials worried about jobs and those focused on inflation. This split makes the outcome of the September meeting highly uncertain. Derivative markets should brace for increased volatility as a result.
The recent July jobs report, which came in at just 95,000 against expectations of 180,000, has clearly shaken policymakers. It has forced us to question if the labor market is weaker than previously thought. This puts more weight on the side of those at the Fed who want to cut rates sooner.
Persistent Price Pressures
However, we see persistent price pressures from the new broad-based tariffs that began phasing in during the second quarter of 2025. The latest Core PCE inflation reading remains elevated at 2.8%, well above the Fed’s target. This is why officials are hesitant to dismiss the inflation threat and commit to a rate cut.
Given this high level of uncertainty, we believe traders should consider strategies that benefit from a large price move in either direction. Buying straddles or strangles on major indices like the S&P 500 could be a sensible approach. These positions profit whether the market rips higher on a dovish surprise or sells off on a hawkish one.
In the rates market, we see opportunity in the disconnect between near-term and long-term expectations. The Fed’s division could lead to volatility in short-term interest rate futures tied to the SOFR. We could see the yield curve continue to flatten if inflation fears keep the Fed on hold while the economy slows.
We are looking back at the trade disputes of the late 2010s as a guide for what might happen now. During that period, the Fed was forced to pivot from hiking rates to cutting them as trade uncertainty began to impact business investment and growth. This history suggests we should not underestimate how quickly the Fed’s position can change.
The CBOE Volatility Index, or VIX, has been creeping higher, recently trading around 19, reflecting this policy confusion. We think buying VIX futures or call options could be a direct way to position for the turbulence expected ahead of the September meeting. This is a pure play on the uncertainty itself.
