Former Dallas Fed President Kaplan believes the Federal Reserve may reduce interest rates in September, though it might delay this decision. He suggests the potential rate cut could bring interest rates down to between 3.25% and 3.50%.
Kaplan does not foresee a sequence of continuous cuts, estimating the Fed has room to make cuts of 75 to 100 basis points before pausing. He emphasises the importance of a Fed Chair who is external and innovative.
Future Approaches and Political Independence
Kaplan aspires for future approaches that are unconventional yet maintain political independence. He stresses the importance of relying on accurate data for decision-making.
We are looking at a potential Federal Reserve interest rate cut in September. The market has been leaning this way, with Fed Funds futures now pricing in about an 85% chance of a 25 basis point cut next month. This sentiment strengthened after the last jobs report for July 2025 showed hiring slowing to 150,000 and the unemployment rate ticking up to 4.2%.
This suggests a strategy for traders using short-term interest rate derivatives, like SOFR futures, could be to position for lower rates into the September meeting. However, we should be cautious, as the path forward is not clear. The view is that this may not be the start of an aggressive series of cuts.
We believe the Fed will be careful, as the most recent CPI inflation data for July 2025, while lower at 3.1%, is still well above their 2% target. This means any cut will likely be framed as a cautious adjustment, not a full pivot to easing policy. This creates an environment where a “hawkish cut” could surprise markets and increase volatility.
Strategies for Traders Amid Uncertainty
Given this uncertainty, options on indices or interest rates could be useful. Traders might consider strategies that profit from a spike in volatility, especially around the upcoming August inflation report and the Jackson Hole symposium later this month. We saw a similar playbook during the mid-cycle adjustment of 2019, when the Fed cut rates but signaled it was not a pre-set course.
The long-term view is that the Fed has room for about 75 to 100 basis points of total cuts. This would eventually bring the policy rate down toward a 3.25% to 3.50% range. The journey there, however, will likely be slow and spread out over many months or even longer.
Ultimately, we must trust the incoming data above all else. The next major catalysts will be the August CPI and employment reports, which will be released before the September meeting. These figures will be vital in confirming whether the Fed acts next month and will heavily influence market positioning in the coming weeks.
