Elevated Threshold For Fed Policy Change
Austin Goolsbee, the Chicago Fed President, expressed that the threshold for a change in Fed policy is elevated. He stated that all options should remain available to the Fed.
He noted that existing tariffs are likely to increase inflation in the short term while adversely affecting growth. Goolsbee mentioned that current tariffs exceed most scenarios, even considering the pause implemented by Trump.
Fed officials maintain that there is no urgency to reduce rates; however, market predictions suggest at least one rate cut in the next two meetings, with 99 basis points anticipated over the next year.
Goolsbee’s comments suggest that he and his colleagues at the Federal Reserve are not inclined to act swiftly without fresh and compelling economic data pointing one way or another. In his view, the bar to adjust monetary policy remains high, which tells us the Committee wants to be methodical — possibly wary of reigniting inflation by easing too soon.
What he outlines about tariffs is direct: they tend to push up prices in the near term while, paradoxically, dragging on growth. So we’re looking at cost pressures from trade policy that do little to stimulate activity. And these aren’t minor adjustments — the present level of tariffs already surpasses what was seen even during the earlier round of trade actions. He emphasises how broad and deep today’s measures are, even with some steps frozen during the previous administration.
Market Predictions And Potential Vulnerability
From the broader policy backdrop, there’s a consistent message: they aren’t rushing to lower rates. The board remains cautious, still seeing price pressures as sticky in some segments — perhaps shelter, or wages — despite recent cooling elsewhere. Yet, interestingly, the futures market is starting to drift from the official line. There’s now an expectation baked into market pricing of a cut relatively soon, and more than one across the next four quarters. Those assumptions don’t square with this kind of cautious tone.
What does this imply for positioning in the short to medium term? The mismatch between what is being said and what is being priced matters. If positioning has leaned heavily on dovish expectations, particularly around early easing, there’s vulnerability in that. If cuts don’t come as quickly as priced, or if they’re deferred altogether, it’s not hard to imagine choppy corrections, particularly in shorter maturities and levered trades tied to front-end futures.
On our side, the gap between Fed rhetoric and forward pricing should sharpen our focus, especially when positioning around the next FOMC decisions. With inflation still resilient in parts and no clear sense of urgency from policymakers, there’s a meaningful chance that those leaning on rate relief too soon are left exposed.
Regarding the trade developments Goolsbee refers to, it’s vital we weigh the potential for pass-through into inflation readings — not only directly in goods, but also in margins, input costs, and forward expectations. If the market begins to sense tariffs are feeding into core rather than being transitory noise, pricing may adjust materially.
We shouldn’t rely on sentiment to drive decisions now. Watch for where expectations and stated policy diverge, and stay nimble across hedges and option structures to account for that. In environments like this, where verbal guidance holds back action, repricing tends to come in sharp jolts.
