Trump is looking at ways to boost his influence over Federal Reserve banks. He wants to nominate someone to replace Lisa Cook on the Federal Reserve’s Board of Governors. Two candidates being considered are Stephen Miran and David Malpass. However, Lisa Cook has stated that she will not resign, and Trump cannot fire her.

Federal Reserve Act Insight

A spokesperson for the Federal Reserve explained that under the Federal Reserve Act, a president can only remove a member “for cause.” Trump’s actions show that he is interested in changing the leadership of the Federal Reserve. The talk of political pressure on the Federal Reserve is causing uncertainty in the markets. We are seeing an increase in expected market volatility. The VIX index, which was around a low of 13 in July 2025, is now rising closer to 17. This suggests that investors should think about buying options for major indices or prepare for larger price movements in the coming weeks. The possibility of replacing Governor Cook with Stephen Miran or David Malpass indicates a shift toward a more relaxed policy approach. The Fed funds futures market has already reacted, now predicting a 50 basis point cut by the first quarter of 2026. This is a big change from the expectations of no change or an increase just two months ago. As a result, trades betting on lower short-term interest rates, like SOFR futures, are becoming more popular.

Impact on Financial Markets

The political pressure on the Fed’s independence is creating a credibility issue, which could weaken the U.S. dollar. This situation is similar to what happened in the late 2010s when perceived pressure from the White House led to dollar weakness. Currently, the Dollar Index (DXY) has dropped nearly 1.5% since this news emerged, suggesting that traders might want to use currency options to protect against or speculate on further declines. While the idea of rate cuts seems positive for short-term bonds, there are increasing concerns about inflation risks in the long term. The gap between 2-year and 10-year Treasury yields has widened by 12 basis points in the past week. Investors are asking for a higher return for holding long-term debt from a potentially influenced central bank. This situation opens up opportunities for yield curve steepening trades, using a mix of short-term and long-term interest rate futures to profit from the growing spread. Create your live VT Markets account and start trading now.

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