US President Donald Trump mentioned in May 2026 that he is considering Kevin Warsh and Kevin Hassett for the Federal Reserve leadership. Trump suggested that Warsh is a strong candidate and pointed out discussions with the Fed chair about interest rate decisions. The Fed’s policies play a big role in shaping the US dollar, as they aim to balance price stability and employment. Changing interest rates can either strengthen the dollar by tackling inflation or weaken it by encouraging economic growth.

Monetary Policy Meetings

The article also explained how often the Fed meets to discuss monetary policy. It covered terms like Quantitative Easing (QE) and Quantitative Tightening (QT), highlighting their impact on the economy and currency. Christian Borjon Valencia, the author, is a finance expert with experience as a retail trader and skills in technical analysis. As Kevin Warsh emerges as a leading candidate for Fed chair, we can expect a more hawkish policy change in mid-2026. Warsh has been critical of keeping money too easy for too long, meaning a Fed under his leadership may focus more on aggressively fighting inflation. This news could change interest rate expectations for next year. This situation is particularly important as the latest Consumer Price Index for November 2025 showed inflation stuck at 3.4%, still significantly above the Fed’s target. The market had been expecting a cautious approach to monetary policy. Now, a hawkish chair adds a new factor that traders need to consider.

Anticipated Market Reactions

In the upcoming weeks, we can expect to see increased implied volatility across different asset classes, especially in interest rate markets. Traders might want to buy protection or prepare for larger price swings by looking at options on Treasury bond ETFs. The VIX futures curve for the second quarter of 2026 is likely to steepen as uncertainty about the new Fed leadership increases. We should also revise our positions in interest rate futures, like Secured Overnight Financing Rate (SOFR) futures, to reflect a higher chance of rate hikes in the second half of 2026. It may be wise to sell contracts for June 2026 and beyond to take advantage of this potential policy shift. This change in expectations is likely to push yields on 2-year and 5-year Treasury notes higher. We saw a similar market response back in 2013 during the “Taper Tantrum,” when the suggestion of reduced bond buying shocked the market. This reminds us how quickly changes in Fed policy can impact bond yields and currency values. The current situation could lead to a similar, but possibly longer, revaluation period. The US dollar is also expected to gain strength from this news. A more aggressive Federal Reserve compared to other central banks would make the dollar more attractive. Thus, taking long positions in the US Dollar Index (DXY) through futures or options is a straightforward way to respond to these changes in the political landscape. Create your live VT Markets account and start trading now.

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