Insights 
VT 
The Federal Reserve has lowered interest rates by 25 basis points following its latest meeting. The decision saw one dissenter, Miran, who favoured a 50 basis points reduction. Fed Chair Powell confirmed there was not widespread agreement for a larger cut. The updated dot plot indicates ten members foresee at least two more 25 basis points cuts this year, while nine anticipate just one more.
Miran’s preference is for a 50 basis points cut at every meeting, with his 2025 projection at 2.875%. The 2026 median dot is at 3.4%, and the 2027 median is 3.1%. Powell termed the rate cut a “risk management” measure, focusing on labour market risks as inflation concerns lessen. He reiterated the Fed’s data-dependent approach to future decisions.
Potential Rate Reductions
The Fed could execute another rate reduction in October and December. Powell noted current market pricing might not be fully endorsed, but it remains under consideration. Markets are focusing on labour market improvements, especially with an upcoming non-farm payrolls report. Soft labour data might prompt more cuts, though improvements could alter this.
Markets are anticipating an additional 44 basis points cut by year’s end, inclined towards two 25 basis points cuts. The absence of dovish signals in the dot plots reflects a lack of support for a more aggressive reduction cycle. The next Fed meeting is on October 29, allowing for assessment of forthcoming US economic data. Current market conditions remain stable, with no substantial sentiment shift evident.
Based on yesterday’s rate cut, we see the Federal Reserve is cautiously beginning an easing cycle. The 25 basis point cut was expected, but the split in the dot plot shows there is no consensus on how quickly to proceed. This division suggests that upcoming economic data will have an outsized impact on future decisions.
The focus now shifts almost entirely to the labor market, which the Fed chair labeled a primary risk. We saw this concern building after the August 2025 Non-Farm Payrolls report came in at a weaker-than-expected 155,000 jobs, and recent JOLTS data showed job openings dipping below 8.4 million for the first time since early 2021. The next jobs report on October 3 will be critical in shaping expectations for the October meeting.
Market Reactions and Strategies
This pivot to labor risks is possible because inflation has been behaving, with the latest Core PCE inflation reading for July 2025 holding steady at 2.7%. This gives the Fed room to react to a cooling economy without worrying about reigniting price pressures. We believe this trend validates the “risk management” approach to cutting rates preemptively.
For derivative traders, this data-dependent environment suggests an increase in volatility around key economic releases. Options strategies like straddles or strangles on short-term interest rate futures (SOFR) could be effective for playing potential price swings following the October 3 payrolls data. Implied volatility is likely to rise heading into that report.
The market is currently pricing in about 44 basis points of further cuts by year-end, which aligns with two more 25 basis point moves. Traders can express this view using December SOFR futures contracts. A weak jobs report would solidify this pricing, while a surprisingly strong number above 200,000 could force a rapid repricing and unwind these dovish bets.
We have seen this playbook before during the “mid-cycle adjustment” of 2019, when the Fed also delivered a series of cautious rate cuts to sustain the expansion. In that period, the market remained sensitive to every data point, creating short-term trading opportunities. This history suggests we should not expect a straight line down for rates but rather a choppy, data-driven path.
