John Williams, President of the Federal Reserve Bank of New York, said the Iran war is expected to push up headline inflation. He said inflation this year should be around 2.75%, while the Federal Reserve remains focused on underlying inflation.
He said the situation for core inflation has not changed much and that tariffs remain a major factor in inflation. He added that monetary policy is where it needs to be and can be adjusted if required.
Growth Outlook And Labor Market
Williams said he expects US GDP growth of 2% to 2.5% this year, with the unemployment rate staying stable. He described the labour market as complex and said it is a low hire, low fire job market.
He said underlying inflation is expected to moderate later this year. He also said the US economy is resilient and that technology is supporting productivity.
He said compensation is growing in line with productivity and is not adding to inflation pressures. He said businesses are adapting to a more uncertain world, and that leadership concerns are not affecting the Fed’s work.
After the comments, the US Dollar Index was down 0.07% at 99.92.
Trading Implications And Hedging
It seems the Federal Reserve plans to look past the short-term inflation spike caused by the conflict in Iran. This suggests they will keep interest rates higher for longer, focusing instead on the more stable underlying inflation numbers. We’ve seen this before, like in 2023, when the Fed held rates firm even as parts of the economy showed signs of slowing.
Traders should therefore question the market’s current pricing, which suggests a nearly 40% chance of a rate cut by the July 2026 meeting. Options that bet against such a cut, like selling calls on SOFR futures for the summer, could be a prudent move. The comments reinforce the idea that the bar for a rate cut is much higher than many believe.
With the Cboe Volatility Index (VIX) sitting relatively low near 16, the market may be underestimating the risk of this war expanding. The conflict could easily push WTI crude oil prices from their current $84 per barrel back over the $100 mark we saw in early 2025. Buying VIX calls for the coming weeks could offer protection against a sudden market reaction to worsening geopolitical news.
The US dollar’s initial muted reaction might be a short-term head fake. A combination of higher-for-longer interest rates and a flight to safety during wartime has historically been very supportive of the dollar. We could consider call options on the dollar index, betting that it will strengthen as these twin realities set in for the broader market.
