Fed Chair Jerome Powell will be speaking during the Federal Reserve’s usual blackout period. However, this talk is special because it’s part of a conference hosted by the Fed.

Focus On Banking Regulation

The conference is called the Integrated Review of the Capital Framework for Large Banks. It will cover banking and capital frameworks, not specific monetary policy updates. Powell’s speech is expected to last about 30 minutes and probably won’t include major policy discussions. Even though the event is focused on regulations, we always pay attention to speeches from central bank officials. It’s wise to keep an eye out for any surprising comments that could affect financial markets. Since Powell is likely to concentrate on banking regulation, we think market volatility will stay low in the near term. This creates an opportunity for traders to sell short-dated premiums, like iron condors on major indices, to take advantage of the expected stability. The goal is to profit from a market that expects little change. Recent economic data supports this outlook, suggesting the central bank has no reason to adopt an aggressive stance. The latest Consumer Price Index shows inflation slowing to 3.2%, and the last jobs report indicates a softening labor market with unemployment rising to 3.9%. These results imply that current policies are effective, which reduces the need for surprise comments.

Positioning For A Year-End Rally

The market is already reflecting this sentiment. According to CME Group’s FedWatch Tool, there is over a 95% chance of no rate hike at the December meeting. With this pause almost fully expected, the risk leans toward Powell potentially sounding more aggressive. Even a simple mention of “further tightening” could lead to a big jump in volatility. Historically, the period after the last rate hike in a cycle has been good for stocks, like in early 2019 after the Fed changed direction. Therefore, we are preparing for a possible year-end rally by exploring longer-term bullish strategies, such as buying call spreads that expire in January. This approach allows us to focus on the overall trend of a policy pause, ignoring short-term fluctuations. However, we should stay alert to the small but real risk posed by any comments from Powell. A cost-effective way to protect against unexpected policy signals is to buy very out-of-the-money weekly puts on an index like the SPY. This serves as low-cost insurance if Powell’s regulatory remarks lean into monetary policy and unsettle the market. Create your live VT Markets account and start trading now.

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