Insights 
VT 
Kashkari of the Federal Reserve recently discussed potential adjustments to the policy rate. The economy is experiencing a slowdown, though the full impact of tariffs on inflation remains unclear. Businesses pre-emptively increased inventory, which has mitigated tariff effects so far.
Addressing Economic Slowdown
Despite these efforts, the Federal Reserve must address the declining economic data. Two rate cuts might be considered this year if the slowdown continues. If inflation rises due to tariffs, the Federal Reserve might pause or even increase rates. The prolonged effects of tariffs necessitate careful monitoring, as it might be advantageous to cut rates promptly and then pause rather than delay action.
Wage growth is decreasing, indicating a cooling labour market. While the unemployment rate is important, the Fed acknowledges potential adjustments are possible. Kashkari refrains from commenting on presidential personnel choices but supports the accuracy of the Bureau of Labor Statistics data. Ultimately, economic conditions cannot be disguised; individuals will perceive the economy’s authentic state in jobs and inflation data.
It appears appropriate for us to prepare for one or two interest rate cuts before the end of the year. The economy is slowing down, and the Federal Reserve must respond to the clear data showing this. The recent July 2025 jobs report, which showed nonfarm payrolls growing by only 95,000, makes this slowdown undeniable.
We should consider positioning for lower short-term rates in the derivatives market. This means looking at instruments tied to the SOFR, which are now pricing in an over 80% chance of a rate cut at the September meeting. This is a direct response to the clear signals of economic weakness.
Stock Market Considerations
For stock index futures, this environment is generally supportive. A dovish Fed often leads to higher equity prices as borrowing costs decrease and sentiment improves. We saw a similar dynamic following the policy pivot in early 2019, which helped extend the bull market run.
However, we must remain watchful of inflation, especially with the uncertainty around tariffs. The latest CPI reading for July 2025 came in at 2.8%, giving the Fed room to act now, but a sudden spike caused by trade policy could force a pause. This uncertainty might increase volatility, making options strategies more appealing than outright futures positions.
The cooling labor market is another key piece of the puzzle. With wage growth declining to a 3.5% annual pace and the unemployment rate ticking up to 4.2%, the data supports the case for easing policy. These figures suggest that the tightness in the labor market is finally easing, reducing a key source of inflationary pressure.
The thinking seems to be that it is better to cut rates now and pause later if needed. Waiting too long for perfect clarity on tariffs could risk a sharper slowdown. This suggests a strong bias toward easing policy in the coming weeks.
