Recent inflation trends are higher relative to the current job situation, as noted by Fed’s Schmid before two key events: the Fed’s meeting on September 16–17 and the Kansas City Fed’s annual conference at Jackson Hole. Schmid expressed a more hawkish stance, indicating rates are not likely to be cut soon.
Schmid remarked that inflation remains above target, with it being closer to 3% than the desired 2%. He suggested that cutting rates now could exacerbate inflation expectations. He emphasised caution with reducing rates, noting that the hardest task is reducing inflation from 3% to 2%, as premature rate cuts could hinder progress.
Need For Definitive Data
He stated a need for definitive data before altering policy and noted that, despite softer job data, there remains optimism among business contacts. Schmid believes the current policy is not overly restricting economic growth. Meanwhile, Powell’s upcoming speech on Friday will be closely monitored for any policy signals.
At the July meeting, the Fed maintained rates at 4.25%–4.5%, with two governors dissenting, favouring rate cuts. President Trump continues to call for lower rates. Earlier, Fed’s Bostic hinted that changes in immigration could adjust job growth expectations to around 50,000, suggesting the recent three-month average of 35,000 is better than perceived.
We see a clear signal that the Federal Reserve is in no hurry to cut interest rates. Recent data, like the July 2025 core CPI holding firm at 2.9%, supports the view that the “last mile” of this inflation fight is the hardest. This suggests policy will remain tight through the upcoming September 16-17 meeting.
While recent job growth has softened, with the latest July 2025 report showing a gain of 45,000 jobs, this isn’t necessarily a sign of deep weakness. Some inside the Fed believe that due to changing immigration patterns, the economy now only needs about 50,000 jobs per month to keep pace, making current levels less alarming. The persistent 4.1% annual wage growth also gives officials reason to stay cautious.
Trading Implications For The Market
For those trading interest rate derivatives, this suggests the recent sell-off in Treasury futures may have more room to run. We’ve seen the market rapidly reprice expectations, with fed funds futures now showing less than a 15% chance of a rate cut before the November meeting. Short-term interest rate futures, like those tied to SOFR, are likely to remain anchored by this hawkish stance.
This “higher for longer” rate environment likely puts a cap on equity index futures for the time being. We could see a range-bound market, creating opportunities to sell premium using options strategies like iron condors on the S&P 500. Traders should also watch the VIX, as any surprise hawkishness from Powell at Jackson Hole could cause a spike in volatility.
We remember looking back at the 1970s, where cutting rates too early reignited inflation and forced even more aggressive hikes later on. This historical lesson is likely weighing on officials’ minds as they aim to avoid a similar mistake. All eyes will now be on the Fed chair’s speech this Friday for any shift in tone, which will be a major catalyst for the market.
