The President of the Federal Reserve Bank of Minneapolis, Neel Kashkari, remains firm in his view that a decrease in inflation would enable the Federal Reserve to decrease its policy rate by twice in 2025, starting in September. Official data has shown only a slight impact of tariffs on prices, economic activity, and the labour market to date.

There is an anticipation that inflation could rise, yet current figures show improvement towards the 2% target. More time is needed to determine whether the impacts of the trade war are postponed or smaller than previously thought. There is a need to focus on genuine inflation and economic data without committing to easing policies in case tariff effects are delayed.

Potential Rate Cuts

Kashkari has maintained that if inflation cools as expected, there could be potential for rate cuts beginning in September of next year. He’s aligning rate reductions with progress toward the 2% inflation benchmark. Right now, headline figures suggest gradual improvement, and the trade-related price pressures appear thus far contained. It’s worth noting the limited direct influence on employment and general economic movement. That said, interpretations pointing to latent effects or smaller-than-expected distortions from ongoing trade disruptions may still be premature.

For us observing this from a derivatives standpoint, it offers an area of opportunity linked to the uncertainty in timing. We’ve seen softer-than-feared tariff transmission to core inflation metrics, raising the possibility that earlier policy flexibility might still be warranted. However, there are enough unknowns that any pre-emptive approach to easing could be risky.

Bond markets have not yet tested the full impact of deferred tariff transmission. Whether it filters through in H2 depends heavily on private sector pricing behaviour. That adds another layer of complexity for those involved in volatility products. With inflation expectations well-anchored and real yields relatively elevated, we might continue to favour expressions that take advantage of persistence in current policy settings. Swaps that lean towards a flattened structure remain interesting.

Inflation and Forward Momentum

Keep an eye on short-end pricing, particularly how forwards evolve in response to soft CPI inputs. If Kashkari’s view gains traction in the Fed’s broader discussions, we could see repricing in longer-dated options steered more by conditional expectations than underlying data. Until inflation shows persistent weakness, any trades reliant on front-loaded easing may carry disproportionate downside.

We’re also weighing the stabilising effects of restricted policy on credit-sensitive assets. It’s tied into the broader macro story—where expectations of Fed flexibility remain, yet history warns against decisiveness too early in the cycle. Remember, last time easing began prematurely, pricing mechanisms questioned Fed credibility. That risk hasn’t disappeared.

For now, constructing strategies around a baseline of stability with optionality for delay seems the cleaner route. Whether gaps are eventually revealed in second-tier data or higher frequency indicators, the larger story still depends on forward momentum in prices—not perceived sentiment.

From our standpoint, trading decisions should lean on what’s measurable: core consumption signals, movement in trimmed inflation aggregates, and changes in wage pressures. Not what might later be blamed on external distortions.

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