Market Impact from Choosing a Federal Reserve Chair

Treasury Secretary Bessent revealed there are 11 candidates for the Federal Reserve Chair role. He plans to begin interviews after Labor Day and will then share a shortlist with President Trump. Currently, Christopher Waller is the leading candidate, with a 30% chance of being chosen. Kevin Marsh follows at 22%, and Kevin Hassett at 18%. Other candidates include David Zervos, James Bullard, Michelle Bowman, David Malpass, Marc Sumerlin, Larry Lindsey, Philip Jefferson, and Lorie Logan. With 11 potential chairs, one key takeaway is the increased uncertainty around future monetary policy. The market is reacting to this uncertainty, as indicated by the VIX rising to 19.5 this week. This is the highest level since early 2024 when there were minor banking concerns. It reflects a growing desire for portfolio protection as we approach September.

Different Market Responses

We should pay attention to the differences between the leading candidates. For example, Christopher Waller, who is currently favored, is seen as a hawkish choice. This might raise interest rate expectations. We’ve already noticed some concerns in the December 2025 Fed Funds futures contract, which has dropped by 5 basis points since the list of candidates was announced. Looking back to the last major leadership change in late 2017, when Jerome Powell took over from Janet Yellen, can give us insight into possible market behavior. During that time, we saw a rise in implied volatility on short-term options as traders prepared for possible policy changes. This suggests that long volatility strategies, like buying straddles on the SPY, could be beneficial over the next few weeks as the interview process unfolds. Timing is crucial with upcoming data. The August jobs report is imminent, and core CPI is stubbornly around 3.1% from the July 2025 report. The new chair will have limited options for action. If any candidate is seen as lenient on inflation, it could lead to a sell-off in the bond market, steepening the yield curve. We should focus on the period right after Labor Day when interviews begin. We can expect increased volatility in response to news and rumors about which candidate is favored. As a result, trading strategies should shift to shorter time frames, concentrating on weekly options to take advantage of these policy-driven market changes. Create your live VT Markets account and start trading now.

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