During a meeting with Philippines President Bongbong Marcos, US President Donald Trump criticized Federal Reserve Chair Jerome Powell. Trump, who appointed Powell in 2018, is unhappy with him for how he is handling interest rates. The federal budget under Trump’s administration is predicted to increase the US deficit by trillions in the next decade. This leads to a need for making US debt payments easier, with Trump pushing for lower interest rates.

Treasury Secretary Comments

US Treasury Secretary Scott Bessent also spoke about the Fed’s role. He supports its independence but suggested reviewing its operations. Bessent thinks the Fed should consider lowering interest rates. Trump stated that the US economy is strong but argued that the Fed’s high rates are politically motivated and harming the housing market. He believes rates should be much lower. These comments highlight ongoing tensions over economic strategies and Fed policies. The focus is on keeping the central bank independent while tackling rising economic issues. We think the struggle between the White House and the Federal Reserve will lead to increased market volatility. The Congressional Budget Office recently estimated that the US deficit will reach $1.9 trillion this year, raising political pressure to lower borrowing costs. Traders should get ready for quick reactions to economic data, especially inflation and employment reports.

Fed’s Stance Amid Political Pressure

The Fed’s own forecasts show it may not align with the political push for significant rate cuts. Minutes from the Fed’s June 2024 meeting indicate only one possible rate cut this year, as inflation, reported at 3.3% in May, stays above their target. This resistance from the Fed against political pressure is a major source of uncertainty. In this situation, we see value in buying volatility while it’s still relatively inexpensive. The VIX, which measures expected market fluctuation, has recently been at low levels, hovering just below 15. Buying call or put options on major indices is a simple way to prepare for the larger price swings we expect. Traders should also keep a close eye on interest rate futures, which reflect market expectations for future policies. Any increase in criticism from figures like Bessent could rapidly change derivatives linked to the Secured Overnight Financing Rate (SOFR). These instruments will react first if the market believes the Fed’s independence is genuinely at risk. Historically, this type of political pressure has caused considerable market disruption, similar to what we saw during Trump’s previous term. While Powell typically focuses on economic data rather than political pressure, the ongoing calls for lower rates cannot be ignored. We expect rate-sensitive sectors, like housing and technology, to be especially volatile in the coming weeks. Create your live VT Markets account and start trading now.

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