Insights 
VT 
Williams from the Federal Reserve predicts the effects of tariffs will last until mid-next year. He notes that the bond market is currently focused more on economic fundamentals.
The bond market remains relatively calm. The Federal Reserve aims to maintain economic stability and manage the tariff impact.
Core Inflation Expectations
Williams assumes tariffs will remain in place but is open to other possibilities. Core goods inflation has risen due to tariffs.
The persistent impact of tariffs is now expected to be a central economic issue extending into the middle of 2026. We are already seeing this in the data, as the August 2025 CPI report showed core goods inflation accelerating to 3.1%, a notable jump from the 2.5% range we saw in the spring. This price pressure is likely to be a defining factor for the next several quarters.
Despite these inflationary signals, the bond market remains surprisingly calm, suggesting it is more focused on broader growth fundamentals. The MOVE index, a key measure of Treasury market volatility, is currently trading near 85, a low we haven’t seen since before the trade disputes escalated earlier this year. This complacency in the bond market presents a potential opportunity, as it seems to be underpricing the risk of a policy response.
The Federal Reserve’s current stance is to allow this inflation to pass through the economy, but this position may not be sustainable. Fed funds futures are only pricing in a scant 20% probability of a rate hike by December 2025, which seems low given the inflation trend. We should consider positioning for a potential hawkish shift from the central bank should price pressures not abate as hoped.
Preparing for Market Volatility
We saw a similar dynamic play out back in 2022, when inflation that was initially viewed as ‘transitory’ forced the Fed into a much more aggressive hiking cycle than the market had anticipated. That historical precedent suggests that the central bank’s patience has its limits. This experience should inform our strategy, as the market could be caught off guard once again.
In the coming weeks, we should look at purchasing derivatives that benefit from rising volatility and an unexpected shift in interest rate policy. This could include buying options on SOFR futures to bet on a steeper rate path or using VIX calls to hedge against an equity market drawdown. Sector-specific plays against industries with high import costs, like retail and manufacturing, also appear attractive.
