Advisors to Trump are thinking about naming a temporary Federal Reserve Governor after the resignation of Fed official Kugler. This would give Trump extra time to choose a permanent chair. The temporary candidate is likely to have previous government experience. This person will be vetted by the Senate before taking the role.

Potential for Prolonged Uncertainty

The news of a temporary Federal Reserve appointment signals that we should brace for ongoing uncertainty. A short-term governor won’t answer the crucial question of who will lead the Fed in the long run, which directly affects future interest rate policy. This lack of clarity is a major concern for markets in the weeks ahead. This situation raises the chance of market volatility. Recently, the CBOE Volatility Index, or VIX, rose from the low teens early this year to around 18 last week, as questions about economic policy increase. The market is now factoring in more risk, and having a placeholder at the Fed will likely keep implied volatility high. For those trading interest rates, this suggests looking at options on SOFR futures. Instead of betting on a clear trend for rates, a smarter strategy is to consider a wider array of possible outcomes. The uncertainty makes it more likely that large, unexpected policy changes could happen later this year. This uncertainty also impacts equity markets directly. The hotter-than-expected Consumer Price Index (CPI) report of 3.4% in July already placed the Fed in a tough spot, and this leadership issue adds to the complications for their next move. It may be wise to buy protection, such as put options on SPY and QQQ ETFs, to guard against possible downturns caused by policy errors or escalated political conflict.

History Suggests Market Uncertainty

We saw a similar rise in volatility in late 2021 during discussions about Chair Powell’s reappointment. The market stayed anxious until a decision was made. History shows that until a permanent Fed chair is appointed and their policies are clear, uncertainty will prevail. Thus, we recommend buying volatility. This means purchasing short and medium-term options expiring in October and December 2025. These positions will benefit from the larger price swings we expect as this leadership situation develops. Create your live VT Markets account and start trading now.

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