Philadelphia Federal Reserve President Anna Paulson commented on the job market, saying it is “bending not breaking.” She suggested that the labour market is a clearer indicator than GDP data.
Potential asset liquidation could spur growth while limiting job creation. Tariff price adjustments may be concluded within the next six months, and the economic outlook is generally benign. Paulson expects inflation to moderate, the job market to stabilise, and GDP to remain around 2%.
Labour Market Risks
Labour market risks remain elevated, but Federal Reserve policy aims to reduce inflation. The state of the job market has supported the Fed’s easing strategy. Tariffs contribute to inflation staying above the target, but inflation may return to normal within a year.
The US Dollar Index (DXY) shows modest gains near 98.50. The US Dollar was strongest against the Australian Dollar today, according to percentage changes against major currencies. The heat map displays percentage changes of major currencies against each other, using the left column as the base currency and the top row as the quote currency.
We are being told the job market is cooling off gently, not collapsing into a recession. The latest December 2025 jobs report supports this “bending, not breaking” view, showing a payroll gain of 155,000 while the unemployment rate ticked up to 4.0%. This suggests the Federal Reserve has room to continue its policy adjustments without panicking about the labor market.
Inflation is clearly moderating, with the last Core PCE reading for November 2025 at 2.8%, which is well off its highs from 2024. This trend gave the Fed justification to cut interest rates three times in the second half of last year. The expectation is that inflation will return to normal as tariff-related price pressures fade over the next two quarters.
Lower Interest Rates
This environment suggests positioning for lower interest rates in the coming months. Options strategies on Secured Overnight Financing Rate (SOFR) futures that would benefit from a continued Fed easing cycle could prove advantageous. We should look for opportunities to anticipate further, measured rate cuts by the Federal Reserve this year.
The “benign” economic outlook points towards lower market volatility, a trend we saw as the VIX index drifted down in late 2025. This creates a favorable backdrop for strategies that involve selling options to collect premium, like selling puts on stock indices. Such a trade profits from a stable market and the continued decay in volatility.
While the US Dollar Index is currently firm near 98.50, the underlying policy of cutting rates is typically a headwind for a currency. We could see the dollar weaken from these levels, especially against currencies where central banks remain less inclined to ease policy. Positioning for a lower dollar against the Euro or Swiss Franc could be a key theme for the first half of the year.
This scenario feels similar to the soft landing we engineered in the mid-1990s, when the Fed successfully cooled the economy without causing a major downturn. During that period, equities performed well after the policy pivot towards easing. Traders should be prepared for a similar dynamic if this outlook holds and labor market risks remain contained.
