Insights 
VT 
Federal Reserve’s Approach to Monetary Policy
Monetary policy in the US is guided by the Federal Reserve with aims to maintain price stability and maximum employment. The Fed adjusts interest rates as a primary tool, impacting the US Dollar’s strength or weakness. The Federal Reserve holds eight policy meetings annually to evaluate economic conditions and set monetary policy.
Quantitative Easing (QE) involves increasing credit flow during crises, typically weakening the US Dollar. Quantitative Tightening (QT), the opposite of QE, tends to enhance the Dollar’s value by reducing bond purchases. The US Dollar Index remains near 98.65 amidst the current economic conditions.
Shift in Economic Indicators
With a Federal Reserve governor signaling that a rate cut is necessary, we are likely entering a more dovish monetary policy phase. The market is already reflecting this, with CME FedWatch data from this week showing a near-certainty of a 25 basis point cut at the next meeting. This aligns with the expectation that the Fed will act, even if more cautiously than some officials would prefer.
The justification for this policy shift is becoming clearer in the economic data. The most recent Q3 2025 advance GDP estimate came in at 1.8%, showing a continued slowdown from earlier in the year. Furthermore, the September inflation report showed core PCE, the Fed’s preferred gauge, at just 2.2%, giving policymakers ample room to cut rates without fear of stoking inflation.
Renewed trade tensions with China are the main source of uncertainty and a key driver for this expected policy easing. Recent reports of China tightening export quotas on rare earth materials have already sent a chill through the manufacturing sector, with the Philadelphia Semiconductor Index falling 4% last week. This is a tangible risk that directly impacts supply chains and future growth projections.
Historical Trends and Trader Strategies
We have seen this pattern before, particularly when looking back at the Fed’s pivot in 2019. During that period, escalating trade war fears similarly pushed the central bank to reverse course from tightening to easing policy. That shift was a significant tailwind for risk assets once the cuts began.
For derivatives traders, this environment suggests positioning for lower interest rates and higher volatility. Options on Secured Overnight Financing Rate (SOFR) futures could be used to bet on the path of rate cuts through 2026. Given the uncertainty around trade, buying put options on equity indices like the S&P 500 or sector-specific ETFs provides a hedge against a sudden downturn.
This outlook also has clear implications for currencies and commodities. A dovish Fed is typically bearish for the US Dollar, making long positions in EUR/USD calls or GBP/USD calls attractive strategies. With gold already trading above $4,250 an ounce amidst these tensions, call options on gold futures or related ETFs remain a primary vehicle for capitalizing on safe-haven demand and falling real yields.
