Tom Barkin, President of the Federal Reserve Bank of Richmond, said the Fed will make decisions meeting by meeting. He said higher gas prices would add to inflation, and the Fed would need to judge how long any rise lasts. Barkin said 2.8% productivity is still a pretty good number. He said he does not yet have a sense of the economic effects of the Iran war.

Gas Prices And Inflation Risk

He said gas prices still affect sentiment and can reduce other spending. He said recent inflation data raises doubts about whether the Fed has finished dealing with inflation. He said corporate margins are steady in part because productivity helps firms absorb the impact of tariffs. He said the last couple of months of employment data has been reassuring. He said Fed policy remains modestly restrictive, while demand is still healthy. He said he favours a smaller Fed balance sheet, provided it does not cause adverse market reactions and the Fed can still control interest rates. The Federal Reserve’s “meeting by meeting” approach means we should expect continued volatility around key economic data releases. With the market currently pricing only a 25% chance of a rate cut at the next FOMC meeting, down from over 60% last month, any surprise in inflation or jobs data will cause significant repricing in interest rate futures. This uncertainty suggests that options strategies designed to profit from volatility, rather than direction, could be advantageous.

Positioning For Data Driven Volatility

Recent inflation data is giving the Fed pause, and traders should be positioned for a more hawkish stance than previously expected. With the last Consumer Price Index reading for January coming in hotter than anticipated at 3.3% year-over-year, the fight against inflation is clearly not over. We are seeing this caution reflected in the swaps market, which is now pricing in fewer rate cuts for the remainder of 2026. The risk from rising gas prices is a primary concern that will directly impact inflation sentiment. Brent crude is currently trading around $92 a barrel, driven by ongoing tensions related to the Iran war, and any further escalation could push prices higher. Traders should monitor energy markets closely, as a sustained move above $95 could force the Fed to delay any potential rate cuts even further. At the same time, the strong labor market gives the Fed cover to remain patient and hold rates steady. Last week’s employment report showed a solid gain of 210,000 jobs, reinforcing the view that demand remains healthy despite restrictive policy. This economic resilience complicates trades that are betting on an imminent economic slowdown forcing the Fed’s hand. Given the uncertain path forward, we should consider trades that benefit from sharp market movements around specific events. With the VIX hovering near 18, buying straddles or strangles on indexes like the SPX ahead of the next CPI release or FOMC announcement could be a viable strategy. This allows for a profitable outcome whether the market reacts with strong relief or renewed fear. Looking back at 2025, we saw how quickly sentiment could shift based on just a couple of data points, particularly during the market’s repricing in the fall. The current environment feels very similar, emphasizing that we must remain nimble. The Fed’s hesitance, combined with solid economic data, suggests the period of stable, predictable policy is not yet here. Create your live VT Markets account and start trading now.

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