Insights 
VT 
Federal Reserve Governor Christopher Waller suggested that the Federal Open Market Committee should reduce interest rates by 25 basis points at the July meeting. He also mentioned the uncertainty surrounding the long-term Fed Fund rate but noted that 3% appears appropriate.
The Wall Street Journal called Waller’s statement a strong endorsement for a rate cut this month. There are no scheduled Federal Reserve speakers for Friday, July 18, 2025, though unexpected appearances may occur.
Federal Reserve Blackout Period
The ‘blackout’ period for the Federal Reserve begins on Saturday, July 19, 2025. This policy restricts FOMC participants and staff from speaking publicly or giving interviews, and it starts two Saturdays before an FOMC meeting.
Given the comments from Governor Waller, we should treat a 25 basis point rate cut this month as our new base case. The CME FedWatch Tool now shows the market is pricing in a 92% probability of such a cut, a significant jump from the 65% chance seen yesterday morning. His words, coming just before the blackout period, are a deliberate and powerful signal to the market.
For our positions, this means we should be looking at options on short-term interest rate futures. The price of September SOFR futures has already rallied, reflecting the lower expected rate. We believe buying call options on these futures offers a clear way to capitalize on the confirmed downward pressure on rates through the summer.
Economic Data Aligns With Fed Moves
This move aligns with recent economic data, where last week’s report showed the unemployment rate ticking up to 4.1% while core CPI cooled to an annualized 2.8%. These figures provide the necessary cover for the committee to begin an easing cycle. Mr. Waller is essentially confirming the Fed is reacting to the data as we expected.
Historically, we have seen this playbook before, such as in the lead-up to the 2019 cuts when officials used final public appearances to cement market expectations. This reduces the risk of a disorderly market reaction on the day of the announcement. We view his statement as a tool to guide markets smoothly toward the committee’s intended action.
Consequently, we should anticipate a related weakening of the U.S. dollar and a supportive environment for equity indexes. Options strategies that benefit from a rally in the S&P 500, such as buying calls on the SPY ETF, are now more attractive. This anticipated policy shift makes dollar-funded trades less appealing in the near term.
With the path forward now less uncertain, we expect implied volatility in the bond market to decrease. The MOVE Index, which tracks Treasury market volatility, has already fallen by 5% since his remarks were published. This suggests that the cost of options may decline, making it cheaper to build positions ahead of the FOMC meeting.
