Fed Delays Seen As Inflation Stays Stubborn
The Federal Reserve seems to be dropping its bias towards cutting rates soon. With inflation proving more persistent, we are adjusting our view on the timing of the first cut. This shift means we should rethink positions that were betting on a September move. Recent data supports this cautious stance, as the latest CPI report showed core inflation holding firm at 3.8%, still stubbornly above the 2% target. Furthermore, geopolitical tensions have kept Brent crude oil prices trading consistently above $90 a barrel, feeding into higher energy costs. These factors make it difficult for the Fed to justify an earlier rate reduction.Market Repricing, Volatility, And Strategic Shifts
The market is already repricing these expectations, with Fed Funds futures now implying only a 15% chance of a rate cut by the September FOMC meeting. This is a sharp drop from the 45% probability priced in just a few weeks ago. We see value in fading any remaining conviction for a summer rate cut. This growing uncertainty about the Fed’s path is causing bond market volatility to rise. The MOVE index, a key measure of interest rate volatility, has climbed back to 115, a significant increase from its lows earlier in the year. This suggests options strategies that profit from price swings, such as straddles on interest rate futures, could be effective. We are adjusting our positions to reflect a first rate cut in October at the earliest, followed by another in the first quarter of 2027. This involves selling shorter-dated futures contracts that price in an imminent cut and looking at calendar spreads. It also means expecting “higher for longer” to be the dominant theme through the rest of the year.Start trading now — click here to create your real VT Markets account.
