Neel Kashkari, President of the Minneapolis Fed, has indicated that there could be two rate cuts in the US this year. This response comes due to a slowing economy, although the full impact of tariffs on inflation remains uncertain.
Importance of Policy Adjustments
Kashkari mentions the importance of adjusting policy rates soon to address the economic slowdown. There’s uncertainty about inflation’s future due to tariffs, which might lead the Fed to either pause or increase rates.
Economic indicators show wage growth is currently on the decline, suggesting a cooling labour market. Despite unknowns, the Fed acknowledges unemployment figures, while recognising they are subject to change.
Kashkari emphasises the authenticity of economic figures and people’s real experiences of the economy. He states that economic conditions are tangible, and convincing people otherwise using jobs or inflation data is not feasible.
With the Fed signaling the possibility of two rate cuts by the end of the year, we’re seeing the market react to signs of a slowing economy. The July 2025 jobs report confirmed this cooling trend, showing weaker-than-expected hiring and wage growth slowing to a 3.5% annual rate. This has shifted expectations for the timing of the first cut, potentially as early as the September meeting.
However, there’s a major wildcard in the form of potential inflation from tariffs, which could force the Fed to pause or even reverse course. The recent July 2025 Consumer Price Index (CPI) showed a slight uptick to 3.4%, reminding us that pricing pressures have not vanished. This uncertainty suggests that buying volatility through instruments like VIX futures or options straddles on major indices could be a prudent way to hedge against a surprise Fed move.
Traders and Market Reactions
We are seeing traders position for lower rates using interest rate derivatives. Futures markets, as of today, are pricing in a high probability of a 25-basis-point cut at the September meeting and a better-than-even chance of a second cut by December. For those convinced of the slowdown narrative, going long on short-term interest rate futures like SOFR contracts remains a direct way to play this anticipated policy shift.
This situation feels reminiscent of the period we saw back in late 2018 and 2019. Back then, the Fed had to quickly pivot from a tightening cycle to an easing one as economic activity faltered under trade pressures. That historical precedent suggests that once the Fed begins cutting, the moves can happen faster than initially expected.
It’s also crucial to remember that the Fed is looking beyond just the headline data, focusing on the real economic conditions people are experiencing. This means that even if inflation remains sticky, signs of a broader slowdown in consumer spending or business investment could be enough to trigger a policy change. We should therefore be wary of becoming too anchored to any single data point, like CPI, when the overall trend points toward weakness.
