Insights 
VT 
The Federal Reserve decided to lower the Federal Funds Target Range (FFTR) to 3.75%-4.00%. Fed Chair Jerome Powell stated the decision was a move towards the neutral rate amidst limited changes in employment and inflation outlooks.
Economic Indicators and Impact
Recent economic indicators suggest moderate economic activity; job gains have slowed, and unemployment rates have edged up but remain low. Inflation has increased throughout the year and remains elevated. Powell emphasised the difficulty in addressing employment and inflation risks with a single tool and acknowledged differing views within the committee on proceeding in December.
The Fed’s decision to cut rates saw a 10-2 voting margin, with some members favouring a different approach. The Federal Reserve also plans to cease its balance sheet drawdown on December 1. The next interest rate decision announcement is scheduled for 18:00 GMT, with Powell’s press conference following.
The market’s reaction included a strong performance from the US Dollar amid changes in US yields. Analysts anticipate further rate adjustments as the Fed recalibrates its policies toward a neutral stance, considering the recent government shutdown’s potential impact on the labour market and inflation.
The Federal Reserve’s decision to cut rates by 25 basis points was fully expected, but the accompanying message was not nearly as dovish as many had hoped. Fed Chair Powell emphasized that another cut in December is “far from assured,” creating significant uncertainty for the weeks ahead. This suggests that positioning for a straightforward continuation of Fed easing is now a risky strategy.
Market Volatility and Strategies
Given the sharp division within the FOMC and the lack of clear economic data due to the government shutdown, we expect implied volatility to rise significantly. The CBOE Volatility Index (VIX) has already jumped over 15% to 19.5, reflecting the market’s anxiety about what the post-shutdown data will reveal about the labour market. We see value in buying options, such as straddles or strangles, on major indices to profit from a large market move in either direction.
The market has swiftly repriced future rate expectations, which creates opportunities in interest rate futures. Following the press conference, CME FedWatch Tool probabilities for a December rate cut have fallen from over 90% to just below 60%. We believe traders should consider fading the idea of an aggressive easing cycle and look at positions that benefit if the Fed stays on hold through the end of the year.
The US Dollar’s strength, with the DXY index holding firm near 98.90, is a key signal that the market is focusing on the Fed’s cautious tone. This reaction is reminiscent of past cycles where the dollar bottomed out once the final rate cut was in sight. We believe selling out-of-the-money put options on the dollar is a viable strategy to collect premium while betting that Powell’s hesitancy will prevent a significant greenback collapse.
