The Federal Reserve’s Williams did not comment on whether the 95% market expectation for a September interest rate cut is accurate.
There is positive news about tariffs not currently causing ongoing inflation. However, determining their full impact on inflation data might require more time.
Key Inflation Risk & Federal Reserve
The latest comments suggest a key inflation risk is now seen as less of a threat by the Federal Reserve. We should interpret the reduced concern over tariffs as a green light for a potential rate cut this month. His refusal to challenge the market’s 95% odds of a September cut further reinforces this dovish stance.
This view is supported by recent data, as the August 2025 core CPI report showed inflation cooling to 2.8%, despite the new tariffs implemented earlier this year. Looking back, we can see this differs from the persistent supply-chain inflation we experienced in 2022, suggesting businesses are absorbing costs rather than passing them on. This gives the Fed more confidence that inflation is on a downward path.
The broader economic picture also points toward a rate cut, with Q2 2025 GDP growth coming in at a sluggish 1.5% and last week’s jobs report missing expectations. Given this slowing momentum, we believe the Fed is now focused on supporting growth rather than fighting inflation. Traders should therefore maintain positions that benefit from falling short-term interest rates.
Future Cuts and Economic Strategy
Specifically, with Fed Funds futures already pricing in the cut, the focus should shift to the path of future cuts. We can use options on SOFR futures to position for continued easing into the fourth quarter. The comments also imply that any unexpected strength in upcoming data could create significant volatility, making long-volatility positions attractive.
