TD Securities said incoming Fed Chair Kevin Warsh supports new inflation tools, such as trimmed mean measures and a possible big-data price project. The firm said these additions are unlikely to change the near-term policy path.
It said Fed officials already track a wide range of inflation and economic indicators. It added that rate cuts would still need clear proof that underlying inflation is returning to normal.
Policy Easing Bar Remains High
TD Securities said the hurdle for easing policy soon remains high. It also said some forces keeping inflation elevated may be temporary.
It said the most likely Fed stance for now is to keep rates on hold. It expects enough evidence by the September FOMC meeting for the Fed to start cutting rates and move gradually towards a neutral setting.
Even with new inflation tools on the horizon, the Federal Reserve’s path of least resistance is to wait. For traders, this signals that betting on rate cuts in the next couple of months is a risky proposition. We believe the Fed will stay in a holding pattern until there is undeniable proof that inflation is normalizing.
This cautious stance is supported by recent data, as the latest Consumer Price Index report for March 2026 showed headline inflation still elevated at 3.1%, driven by persistent services and shelter costs. This makes it difficult for the Fed to justify easing policy soon. The market is now pricing in less than a 20% chance of a rate cut before the September meeting.
Market Implications For Traders
Looking back to late 2025, many of us were expecting cuts to begin by the summer of 2026, but that timeline has shifted. The strong March 2026 jobs report, which added a solid 240,000 jobs, further solidified the case for patience. Therefore, the focus for the coming weeks should be on a Fed that is on hold.
Given this expected stability, volatility may remain low in the near term, with the VIX index hovering around 14. This environment could favor strategies like selling short-dated options to collect premium, as a sudden policy shift appears unlikely before late summer. However, any unexpected inflation or employment data could quickly disrupt this calm.
For interest rate derivatives, the play is to look further out on the calendar. Traders might consider positions that reflect a cut around the September meeting, rather than in June or July. This could involve using options on SOFR futures to target the fourth quarter for a potential policy pivot.
In the equity markets, a “higher for longer” stance from the Fed acts as a headwind for growth. A prudent approach would be to use derivatives for defensive positioning. This might include buying protective puts on broad market indices to hedge long portfolios against any downside if the market grows impatient with the Fed’s delay.
