Insights 
VT 
The Federal Reserve Bank of Kansas City President, Jeffrey Schmid, has voiced his reasons for opposing a rate cut. He pointed out that the labour market remains stable, the economy is experiencing ongoing momentum, and inflation rates are still elevated.
Schmid further noted that financial conditions appear relaxed, without indication of being overly strained. He stressed that policy needs to remain somewhat restrictive to mitigate demand and price pressures.
Potential Risks of Lowering Rates
Lowering rates could pose risks if the Federal Reserve’s commitment to a 2% inflation target is doubted. The comments were evaluated as hawkish, leading the US Dollar Index to increase by 0.13% to 99.65.
In currency markets, the EUR/USD has dipped to its lowest in three months, aligning with a strengthening US Dollar amidst hawkish Federal Reserve rhetoric. Meanwhile, GBP/USD hit a seven-month low, as the firm Dollar combines with concerns over the UK’s fiscal outlook.
Gold prices retreated below the $4,000 mark, facing a challenging second week as traders await Federal Reserve officials’ remarks. In the crypto market, Bitcoin and other altcoins showed slight recovery after recent downturns, with BTC bouncing above $110,000.
With dissent within the Federal Reserve now public, we must acknowledge that the path of interest rates is not as clear as it seemed. The recent rate cut is being challenged internally, suggesting a “one and done” scenario is a real possibility. This hawkish view, centered on a strong economy and sticky inflation, is fueling the US Dollar’s recent rally.
This perspective is supported by the latest economic data from earlier this month. The September jobs report showed the economy added a solid 220,000 jobs, while the most recent inflation figures peg the annual rate at 3.1%, still stubbornly above the 2% target. These numbers give credibility to the argument that policy needs to remain restrictive to lean against price pressures.
Opportunities in Currency and Interest Rate Markets
For derivative traders, this division at the Fed signals rising uncertainty and potential for increased market volatility in the coming weeks. We should anticipate that the VIX, which has been hovering near 18, could spike as the market digests the possibility of no further rate cuts. This environment makes strategies like buying options on major indices more appealing to protect against or profit from larger price swings.
The most direct play is on continued US Dollar strength, with the DXY index already pushing toward the 100 mark. We see opportunities in using currency options to bet on a stronger dollar against the Euro and Pound, which are already showing weakness. For instance, buying call options on the USD or put options on the EUR/USD and GBP/USD aligns with the current momentum.
Interest rate derivative markets will be key to watch as traders reprice the path of future policy. The odds of another rate cut by year-end are likely diminishing, which could create opportunities in SOFR futures. We can expect to see selling pressure on these contracts, reflecting a market that is shifting its expectations toward a “higher for longer” reality.
We only need to look back to the aggressive rate-hiking cycle of 2022 and 2023 to be reminded of the Fed’s commitment to fighting inflation. The dissent signals that this institutional memory is still very much alive within the committee. Therefore, we should not assume that the recent cut marks the beginning of a sustained easing cycle.
