Insights 
VT 
Federal Reserve Governor Christopher Waller discussed the outlook for interest rates, inflation, and the US economy. He mentioned that while inflation is on its way to 2%, it does not pose a hindrance to rate cuts.
The pace of rate cuts could slow if GDP remains strong or the job market improves. However, if the job market weakens, the Fed may cut toward a neutral rate. The current neutral interest rate is 100 to 125 basis points lower than the existing Fed Funds Rate.
Labor Market Data
Waller emphasised the importance of labour market data, which indicates possible actions for the Fed. Tariffs are expected to have a modest effect on inflation, which remains aligned with the 2% target.
There are discrepancies between the strength of economic growth and signals from the labour market, presenting conflicting indicators. Currently, the Fed’s focus is on the job market’s status to guide future decisions.
Currency changes today show the US Dollar’s movements against various currencies, such as a 0.16% fall against the Australian Dollar. The US Dollar showed varying strength, being weakest against the British Pound and strongest against the Canadian Dollar.
Based on the Fed’s latest comments, we see a clear pivot in focus from inflation to the labor market. The message is that falling inflation is no longer a barrier to rate cuts, but a weakening job market is now the main reason to act. This means upcoming employment data will be the most important driver for market direction.
Interest Rate Derivatives and Market Strategy
This shift makes sense given recent trends, as the September 2025 Consumer Price Index (CPI) showed core inflation cooling to a 3.5% annual rate. This downward path confirms that the inflation problem is largely in the rearview mirror. It gives the central bank the flexibility it needs to address other economic concerns.
The labor market is already showing the “clear warnings” mentioned. We saw in the latest jobs report for September 2025 that Non-Farm Payrolls missed expectations, adding only 150,000 jobs, while the unemployment rate ticked up to 4.1%. Job openings have also been steadily declining, falling to 8.5 million in August 2025, a sharp drop from the highs we saw in 2023.
This creates a data-dependent environment, so we should expect significant volatility around upcoming jobs reports, like the weekly jobless claims and the next monthly payrolls data. Derivative traders should consider strategies that benefit from sharp price swings, such as buying options on equity indices or currency pairs ahead of these key releases. A miss in jobs data could trigger a significant market reaction.
For those trading interest rate derivatives, the path is becoming clearer. With the neutral rate estimated to be about 1% lower than the current Fed Funds Rate, there is room for several cuts. We should be positioning for lower rates in the coming months by looking at SOFR futures, anticipating that any further labor market weakness will force the Fed’s hand, similar to the policy pivot we saw in 2019.
In the currency market, this outlook is bearish for the US Dollar. Anticipation of rate cuts makes the dollar less attractive, which explains its recent softness against the Euro and Pound. We can use options to position for further dollar weakness, for example by buying calls on EUR/USD or puts on USD/JPY.
This environment is very supportive for gold, which benefits from lower interest rates and a weaker dollar. The move towards $4,300 per ounce is likely just the beginning if the Fed does start an easing cycle. Using gold futures or call options is a direct way to trade this expectation of looser monetary policy.
