US Treasury Secretary Scott Bessent stressed the need to look at inflation trends instead of fixating on any one number. He mentioned that inflation isn’t speeding up, and he hadn’t yet seen the day’s Consumer Price Index figures. Bessent also acknowledged President Trump’s statement that he wouldn’t dismiss Federal Reserve Chair Jerome Powell, despite previous forecasting mistakes by the Fed. Bessent highlighted the importance of an independent central bank in shaping policy and noted that the process to find Powell’s successor has begun. He pointed out that there are many qualified candidates, both from within and outside the Federal Reserve, but the decision will happen at Trump’s preferred pace.

Stability In International Relations

When discussing international relations, Bessent said that U.S.-China relations are stable and that he plans to meet with his Chinese counterpart soon. He has no plans to rush any deals based on market deadlines. Although the Fed and high-ranking officials look at data before it’s released, they avoid commenting until it is official. This practice has led to speculation in the past, particularly when the Non-Farm Payroll (NFP) data surprised the market positively after concerns about Powell’s timing. From Bessent’s remarks, it seems the market is caught in a tactical trap, focusing too much on small battles rather than the overall picture. His message is clear: we shouldn’t be swayed by a single inflation report. The market fixation on minor changes in the Consumer Price Index is distracting us from broader trends. Recently, the CPI showed a yearly increase of 3.3%, far from the 9.1% peak in June 2022. The overall trend is clearly downward, indicating that the Federal Reserve may need to adjust its approach. In the weeks ahead, we should consider any volatility from inflation as a chance to sell. When implied volatility on S&P 500 options rises near data releases, we view this as an opportunity to sell premium, potentially using iron condors or short strangles on indexes and related ETFs. The market often forgets quickly, and after initial panic, it will likely return to normal, realizing that one month’s data won’t change a two-year trend of declining inflation. Currently, the market only expects one or two rate cuts for the rest of the year, according to CME FedWatch Tool data. Bessent’s suggestion that the Fed could be making a forecast error indicates that market prices are too aggressive, which benefits risk assets.

Longer Term Strategy

The most important insight, however, is related to the longer-term outlook. Bessent’s mention that the search for Powell’s successor is already happening, with an unpredictable timeframe, could lead to future turbulence. This isn’t a concern for next week but is a structural risk for the fourth quarter and beyond. Historically, transitions in Fed leadership—like from Greenspan to Bernanke or Yellen to Powell—have brought increased market anxiety. With the CBOE Volatility Index (VIX) currently low, the market gives us an opportunity to buy long-term protection affordably. We should consider purchasing longer-dated options, such as puts on major indices for late 2024 or early 2025, or even VIX call options. This creates a balanced strategy: we sell short-term tensions while buying long-term, policy-related fear at a discount. The easing of tensions with China supports this view by reducing immediate systemic risk and allowing us to focus on anticipated domestic volatility. Create your live VT Markets account and start trading now.

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