Jerome Powell said there is tension between the Fed’s two objectives, and that it makes sense there is not unanimity. He said policy is in a good place to wait and see how the current situation plays out, and that the Fed does not know what the economic effects will be. He said the Fed is committed to getting inflation back to 2% on a sustained basis. He described tariff inflation as a one-time price increase that could add a half to a full percentage point to inflation.

Fed Policy Tradeoffs

Powell said events in the Middle East affect gas prices. He said the Fed tends to look through supply shocks, but must watch inflation expectations, which appear anchored. He said research tends to find that buying long-term assets lowers rates and supports the economy, and he said there is something to that. He added that the downsides from a large balance sheet that many predicted have not been seen. Powell said the Fed needs to be fully independent and non-political, while regulation is different since Dodd-Frank. He said this is a time of very low job creation and that something longer-term may be happening outside the normal business cycle. He said AI is making people more productive and that he is very optimistic about the medium and longer term. He also said it is a challenging time to enter the job market.

Market Implications And Positioning

We are seeing that the Fed’s policy is in a “good place to wait,” just as we were told to expect in 2025. With the federal funds rate holding steady at 5.25% for the last three meetings, traders should anticipate continued range-bound markets in the short term. The CME FedWatch Tool is now pricing in a 65% probability of a rate cut by the July 2026 meeting, indicating that patience is wearing thin and a policy pivot is expected. The commitment to reaching 2% inflation remains the Fed’s public stance, justifying the current high rates. However, with the latest February 2026 Consumer Price Index data showing inflation has cooled to 2.8%, the pressure to cut is building. The University of Michigan’s survey of inflation expectations remains anchored near 2.9% for the five-year outlook, giving the Fed cover to eventually ease policy without spooking the market. Looking back, the warnings from 2025 about a challenging job market are now our reality. The February 2026 jobs report showed a meager gain of just 95,000 non-farm payrolls, a significant slowdown from the 180,000 monthly average we saw throughout much of 2025. This weakness is the primary catalyst for the market’s dovish expectations and supports strategies that benefit from falling rates, such as buying SOFR futures contracts. We must also remember the tendency to look through supply shocks, a relevant lesson given recent events. Last week’s tensions in the Strait of Hormuz caused WTI crude oil to spike 8% to over $82 a barrel, creating a wave of uncertainty. This environment suggests that buying volatility through options on energy ETFs like the XLE could be a prudent way to hedge against further geopolitical flare-ups. The view that the Fed’s large balance sheet hasn’t produced major downside risks also continues to hold. The balance sheet still sits above $6.8 trillion, and its gradual reduction has not caused the market disruptions that many had feared a year ago. This reduces the tail risk of a sudden liquidity crunch and should provide some comfort for those with long-term bullish positions in equity index derivatives. Create your live VT Markets account and start trading now.

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