Treasury Secretary Bessent is starting interviews to find a new Federal Reserve Chair to replace Powell this Friday. The interviews will take place in person or via video and will continue into next week. There are 11 candidates for this important role. Notable names include Fed governors Christopher Waller and Michelle Bowman, National Economic Council Director Kevin Hassett, and former Fed governor Kevin Warsh. After the interviews, Bessent will send a shortlist of candidates to President Trump. Trump had mentioned that the search for Powell’s successor would begin soon after Labor Day. Now that the official search is on for the next Federal Reserve chair, we expect market volatility to rise. This uncertainty around future monetary policy suggests that the calm market conditions we saw in August are likely coming to an end. Traders should brace for larger price changes in interest rates, currencies, and stocks in the upcoming weeks. We think it makes sense to prepare for this shift using options, especially since the CBOE Volatility Index (VIX) is currently low at 14. This situation feels similar to late 2017, just before Yellen stepped down and Powell took over, which led to a big spike in volatility in February 2018. As a result, we are considering buying VIX calls or VIX futures set to expire in October as a hedge against increasing market instability. The initial list of candidates includes hawks like governors Waller and Bowman, which suggests that a more aggressive interest rate policy could be on the horizon. A hawkish appointee would likely mean a “higher for longer” interest rate situation, which could hurt growth stocks that have done well this year. This is a direct risk for the Nasdaq 100, which has surged over 12% in 2025 based on the belief that the Fed’s tightening cycle was over. Given this risk, we are pricing protective puts on the QQQ, the ETF that tracks the Nasdaq 100. Any news hinting that a hawkish candidate is leading could quickly undo the recent gains in tech and other rate-sensitive sectors. A drop back to last quarter’s lows wouldn’t be unexpected in such a case. This leadership change will also affect the Treasury yield curve, which has already flattened significantly this year. A hawkish Fed chair would likely keep short-term rates high, increasing the chance of a deeper inversion between the 2-year and 10-year yields. Therefore, we are looking at trades that would profit from falling prices in long-duration bond ETFs like TLT.

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