President Trump has once again criticized Federal Reserve Chair Jerome Powell in a post on Truth Social. He refers to “The Board,” suggesting he may try to influence other members. The tension between Trump and Powell is ongoing, and Trump’s comments indicate he has a broader strategy in mind. This suggests that Trump aims to impact monetary policy beyond just Powell.

Political Risk in Monetary Policy

The former president’s public criticism adds political risk to monetary policy. This creates uncertainty that goes beyond economic data, making traders factor in possible future pressures on the Federal Reserve. We should prepare for more unpredictable policy signals in the coming months. The market is already expecting rate changes. The CME FedWatch Tool shows a greater than 60% chance of a rate cut by the September meeting. However, this new political element might either speed up that timeline or lead the central bank to delay decisions to maintain its independence. This tug-of-war makes short-term interest rate futures less predictable. This situation is likely to increase volatility. Historically, the VIX index, which measures anticipated market volatility, has risen during times of political tension affecting economic institutions. Traders should think about buying options for protection, as the cost of this insurance will likely rise as the election approaches.

Influencing the Board

Trump’s reference to influencing other board members is an important point that hints at a long-term strategy. This means that even if Powell remains steady, the makeup of the voting committee could change in the future. Therefore, we should consider looking at longer-dated derivatives, especially those expiring in early 2025, to protect against significant policy shifts. However, we must pay close attention to the data, as Powell will rely on it to shield himself from political pressure. With the latest annual inflation rate at 3.3%, well above the 2% target, he has strong reasons to resist calls for immediate and aggressive cuts. Any move away from this data-driven approach would signal a notable impact from political pressure. Create your live VT Markets account and start trading now.

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