Insights 
VT 
The Federal Open Market Committee (FOMC) of the Federal Reserve is experiencing deep internal divisions regarding future monetary policy, as revealed in a recent meeting. Fed Chair Jay Powell indicated varying opinions on interest rate adjustments, with some members advocating for further cuts while others prefer maintaining the current rates. Stephen Miran supported a 50 basis point cut, whereas Kansas Fed President Jeffrey Schmid preferred no change.
The potential for a December interest rate cut remains uncertain, contradicting market expectations based on Fed Funds Futures. As a result, an unexpected hawkish stance emerged, leading to the appreciation of the US dollar. Despite the uncertainty, the possibility of a December rate adjustment is more plausible, contributing to the currency’s recent strength.
Labor Market Data And Decisions
Without specific labour market data, some central bankers, including Miran, support rate cuts, yet there is caution in committing to a decision without comprehensive statistics. The direction in which FOMC members will lean is still unknown, leaving the prospect of further USD appreciation uncertain. Caution is advised in making definitive predictions ahead of the next meeting, considering the current data limitations.
The Federal Reserve’s meeting yesterday has thrown our expectations for a loop. The market was largely pricing in a December interest rate cut, but the deep division within the FOMC now makes that a 50/50 proposition at best. We saw the dollar strengthen immediately, with futures markets now showing the probability of a December cut has fallen from over 70% just last week to below 40% today.
The core of this uncertainty is the current data gap, particularly the lack of official labor market statistics. Without this crucial information, the Fed is hesitant to commit, which is why we saw implied volatility on major currency options spike to its highest level in three months. This environment makes simple directional bets on the dollar extremely risky until we get more clarity.
Volatility And Market Strategy
For the next few weeks, buying volatility appears to be the most sensible strategy. We should look at purchasing options, like straddles or strangles, with expirations after the December FOMC meeting to capitalize on a significant price swing, regardless of the direction. This approach positions us to profit from the eventual resolution of the Fed’s current indecision.
This situation feels similar to the period in late 2018, when the Fed was forced to pivot quickly from a hawkish to a dovish stance as data changed. With Q3 GDP growth coming in at a respectable 2.5% but the latest CPI inflation figures remaining stubbornly high at 3.5%, both the hawks and doves at the Fed have a case. The release of the delayed jobs report will be the critical piece of data that likely swings the vote one way or the other.
