Insights 
VT 
The current state of the economy and policy is considered stable. Concerns over the impact of tariffs on inflation have decreased from when they were initially announced.
There are various possibilities regarding how much tariffs might pass on to customers. Economic fundamentals may be moving to a point where an interest rate cut could become necessary.
Market Anticipation
CEOs remain cautiously optimistic about the impact of tariffs. A potential interest rate cut is more likely in autumn rather than July unless there is a downturn in the labour market.
The market is currently anticipating a 15% chance of an interest rate cut in July. This response contrasts with earlier comments from another Fed representative but has not surprised market observers.
What we’ve seen lately is a slight calming in what had been an anxious market environment driven by questions around trade tensions and their inflationary ripples. The worst-case fears surrounding tariffs have not played out in force, and this is now gently reflected in pricing expectations and sentiment. At the start, these duties raised alarms—mainly that they might push costs higher in a way that directly affected broader consumer inflation. But the data up to now hasn’t supported that outcome in a sustained way.
Pricing models suggest that while some costs have trickled through, the net effect on headline figures remains muted. In some sectors, firms are absorbing cost increases, which limits the flow-through to consumers. That said, we are watching several indicators closely—namely, wage growth and service-sector costs—to ensure no latent build-up is taking shape.
Economic Outlook
On the macro side, the larger picture points to an economy that’s held steady, albeit with some tell-tale signs of fatigue. Inventory buildups aren’t clearing as quickly and business investment has softened in certain pockets, hinting at more caution beneath the surface. These are just a few of the variables helping shape expectations regarding the path for rates.
Powell signalled there is no immediate pressure to act, providing room for policymakers to evaluate more data over the coming weeks. Should jobs figures show any downward drift or inflation move well below target, then the balance of risks might begin tilting more decisively. As of now, the probability attributed to a move in July remains low—markets only price in a slim chance, around 15%, and that tells us the consensus doesn’t align with the idea of immediate action.
From where we sit, it suggests that the next few weeks will be about weighing the pace of hiring and the resilience of service inflation, rather than reacting to noisy headlines. What’s also notable is how this latest communication contrasts with prior messaging by Waller, who has been more outspoken in linking tariffs and monetary response.
For traders focused on instruments tied to interest rate expectations, the guidance here is less about direct forecasts and more about adjusting positioning frameworks to reflect a waiting game. Volatility might remain compressed in the front end unless triggered by surprises in job reports or inflation pulses. There’s less appetite now to push for early repricing.
That leaves a seasonal opening for temporary calm, but it comes with a need for attention to any revision in forecast ranges by the Fed later this summer. The path ahead now involves reacting more to the labour market’s performance than to consumer prices. Derivatives strategy should now align more with this emphasis—monitoring employment trends and policy tone shifts rather than betting on a July move. Adjusting exposure accordingly could help navigate the period with leaner risk curves.
