The Federal Reserve’s Daly indicates that the Fed will probably need to adjust its policy in the upcoming months. She remarks that the Fed can’t wait for perfect clarity before acting.
Tariffs are unlikely to cause persistent inflation requiring monetary policy changes. The labour market has weakened, and any further slowdown would be undesirable.
Monetary Policy Adjustment
Monetary policy requires adjustment to align with the risks to the Fed’s objectives. Daly speaks at the Anchorage Economic Summit about inflation and the slowing economy.
She notes that inflation is trending down, excluding tariffs, as the economy slows and monetary policy remains restrictive. Additional labour market slowing is seen as problematic because once it falters, it tends to decline rapidly.
Daly’s openness to a rate cut reflects a shift among FOMC officials toward rate cuts in future meetings. She suggests two FOMC rate cuts in 2025 may be suitable, and a rate cut in September is looking more likely.
Based on the growing signals for a policy adjustment, traders should anticipate an interest rate cut in the coming months. We are seeing a clear shift in tone from key officials, which reduces uncertainty about the Federal Reserve’s next move. This makes positioning for lower rates a primary focus right now.
Labor Market Concerns
The concern over the labor market is a key driver for this change. We saw the unemployment rate edge up to 4.2% in July 2025, and last week’s jobless claims were higher than expected, underscoring the risk of a rapid slowdown. Officials seem determined to act before the labor market, which they note can “fall quickly and hard,” deteriorates further.
This dovish pivot is made possible by cooling inflation. With the latest Core PCE reading for July coming in at 2.5%, we are now much closer to the Fed’s 2% target than we were at the start of the year. This gives officials the green light to focus on the other side of their mandate, which is employment.
For equity traders, this suggests buying call options on major indices like the S&P 500. Lower rates generally boost stock valuations and corporate earnings, a pattern we saw during the market rally in early 2024 when the Fed first signaled an end to its hiking cycle. The current setup feels very similar to that period of anticipation.
The most direct play is in interest rate derivatives. We should consider going long Secured Overnight Financing Rate (SOFR) futures, as their prices will rise when the market fully prices in a rate cut for September. This is a straightforward way to speculate on the Fed’s signaled policy change.
In the currency market, the U.S. dollar is likely to weaken as lower rates make it less attractive to hold. Traders could look at buying futures or call options on currencies like the Euro or the British Pound against the dollar. This trade benefits directly from a decline in U.S. interest rate expectations relative to other countries.
Volatility is also an important consideration, as it has been elevated due to policy uncertainty. As the path to a rate cut becomes clearer, we can expect the VIX index to decline. Selling VIX calls or VIX futures could be a profitable strategy for those who believe the Fed’s clarity will calm market nerves.
