Good morning, traders…

On the surface, Wednesday’s Federal Reserve interest rate decision might seem straightforward.

Markets priced in a 96% chance of a quarter-point cut. And they got it.

Everyone expected Powell to deliver the cut and give his normal, measured commentary.

Instead, Fed Chairman Jerome Powell dropped clues that could reshape the next 18 months of trading…

He didn’t just cut rates — he telegraphed a fundamental shift in Fed priorities. The language around employment versus inflation changed. The economic projections moved. Most importantly, Powell revealed the Fed’s new framework for evaluating future cuts.

This was the Fed acknowledging that something has shifted in the underlying economy, and their response will create trading opportunities most people won’t see coming.

Every word Powell spoke matters because the Fed just entered what they call “data-dependent” mode. 

That means every jobs report, every inflation print, and every economic surprise now carries 10x the market-moving potential it had six months ago.

The traders who understand these nuances will position themselves ahead of the moves. The ones who don’t will spend the next year chasing news after prices have already moved.

Here’s What Powell Said That Could Change The Next 18 Months…

What Powell Said

The Fed cut the federal funds rate by 25 basis points, bringing the target to 4.00%–4.25%. 

At the same time, they committed to continuing balance sheet reduction, meaning quantitative tightening continues behind the scenes.

We’re seeing signs of slower growth. 

First-half GDP came in around 1.5%, down from 2.5% last year. 

Consumer spending has softened. (But business investment in equipment and intangibles has actually picked up.)

Housing? Still weak.

Labor market data is weakening. Unemployment ticked up to 4.3% in August. Job gains have slowed to around 29,000 per month over the last three months. 

Powell pointed to lower immigration and falling labor force participation as key reasons the labor supply is shrinking. Demand for workers is also down. Wage growth is slowing but still outpacing inflation.

Inflation, while down from peak levels, remains above target. PCE inflation was 2.7%, and core PCE came in at 2.9%. 

Most of that rise comes from goods prices, which have been picking up. Inflation expectations in the short term have drifted up slightly (mostly due to tariff news), but long-term expectations remain anchored near the Fed’s 2% target.

This points to a shift in the “balance of risks…”

Powell said downside risk to employment has grown, while inflation risk is less dominant than earlier this year. 

That shift was the key reason for Wednesday’s rate cut. He called it a “risk management cut.”

The Summary of Economic Projections shows the Fed expects:

• Unemployment to reach 4.5% by year-end and gradually ease
• Inflation at 3.0% in 2025, 2.6% in 2026, and 2.1% by 2027
• A lower expected rate cut path than thought in June, suggesting more cuts may come if data continues to deteriorate.

What It Means For Your Trading

Powell’s tone was a warning light on the labor dashboard. 

He said this isn’t the beginning of a preset cutting cycle. The Fed will stay “data dependent,” which means every jobs report and inflation print will carry extra weight.

Think of this as the first mile marker on a new road…

The Fed is starting to ease, but with one eye still glued to inflation and the other watching the jobs market falter.

This creates several trading implications:

• The Fed is walking a tightrope. Too much easing and inflation might rebound. Too little and the labor market could slide off a cliff.
• Options traders should expect increased volatility around data events — especially payroll reports, CPI/PCE prints, and any surprise revisions.
• Room exists for more rate cuts, but they’ll be conditional on data. The market is pricing in more than the Fed may deliver.
• The talk of “neutral” policy tells us the Fed is no longer in full-blown restrictive mode. That could support rate-sensitive sectors like tech, real estate, and consumer discretionary. 

What To Watch Next

There are three key areas to track regarding Fed policy:

Jobs Data — Powell said the labor market has reached a “curious balance” where both supply and demand have fallen. But if job losses outpace hires — especially in vulnerable groups (like young people) — the Fed may be forced to move faster.

Tariff Pass-Through — Goods inflation is back. Powell attributes much of that to tariffs. He believes it’s a “one-time shift,” but if it becomes stickier, that could pressure the Fed to hold or even hike. Options tied to importers, exporters, or consumer staples could face volatility here.

Consumer Credit Stress — Powell acknowledged rising delinquencies and softening credit scores. If this accelerates, it could feed into broader economic weakness (and possibly increase the odds of deeper cuts).

This is one of those rare windows where both risks are in play. That’s why Powell said there’s “no risk-free path.” 

No one knows what will happen in the future. As traders, all we can do is prepare for the most probable outcomes. 

Wait for the market to misprice risk through options, then take advantage. 

Because in a data-sensitive Fed cycle, mispricing is inevitable.

And speaking of mispricing…

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Happy trading, 

Ben Sturgill

*Past performance does not indicate future results