Market Expectations
Credit Agricole predicts the Federal Reserve will execute two interest rate reductions by year’s end, one in September and another in December. They foresee a target rate of 4.00% following an extended policy pause.
The prediction is based on persistent inflation, limiting the Fed’s capacity for bold monetary policy easing. The US economy shows a slowing trend, yet it is not entering recession territory.
Credit Agricole assesses the labour market as relatively stable, allowing the Fed to steer clear of severe easing actions. Inflation may accelerate temporarily due to tariffs, but this effect is projected to be short-lived.
The overall forecast comes as the US anticipates the release of the upcoming jobs report, which will provide further insights for the Fed’s decision-making process.
With the Federal Reserve now expected to begin cutting rates in September, we see a path for two 25-basis-point cuts by the end of the year. However, sticky inflation, with the last core CPI reading for July 2025 holding at a stubborn 3.4%, means the Fed cannot ease aggressively. This outlook points to a slow and deliberate cutting cycle.
Investment Strategies
We are watching interest rate futures, such as those tied to SOFR, which have priced in a high probability of that first cut next month. The upcoming US jobs report, due in early September, is the most immediate catalyst that could shift these odds. A surprisingly strong report would challenge the September cut narrative and likely increase short-term volatility.
This scenario suggests a contained rally in equities, unlike the sharp market pivots we saw back in late 2023 when rate cuts were first anticipated. Given the uncertainty, options strategies that benefit from a rise in volatility, such as buying straddles on the S&P 500 ahead of key data releases, could prove advantageous. The CBOE Volatility Index (VIX) has been hovering near 15, which is historically low and presents a cheap entry for volatility plays.
The labor market’s continued health, with the last Non-Farm Payrolls report adding a respectable 190,000 jobs, gives policymakers an excuse to remain patient. For us, this means any trading position that is heavily dependent on a rapid series of rate cuts carries significant risk. We are viewing data that shows continued economic strength as a short-term headwind for bonds and equities.
We also have to consider the risk that tariffs could cause a temporary re-acceleration in inflation later in the year. This complicates any simple directional bet that interest rates will fall in a straight line. It may be prudent to hedge long-duration positions against a short-term spike in inflation expectations.
