Fed’s Waller is a top candidate for the new Fed chair, according to Bloomberg. The Trump team supports Waller because he predicts Fed rate cuts. He has met with the Trump team, although not directly with Trump. Trump claims to support the Fed’s independence but recent comments from the White House suggest that Fed actions reflect political divides based on who chose the Fed governors. Trump wants to tilt this political balance in his favor, viewing a new Fed chair appointment and a replacement for Kugler as beneficial. If Waller becomes chair, it will leave two governor positions open.

Market Expectations for Fed Governor Waller

The news about Fed Governor Waller being a leading candidate for the new Fed Chair is changing market expectations. This indicates that the central bank may adopt a more dovish stance sooner than expected. This shift is not yet fully considered in the market, which presents an opportunity. Currently, futures markets are only anticipating one 25-basis point rate cut by the end of the year. For example, the CME FedWatch Tool shows a nearly 60% chance that the Fed Funds Rate will stay in the current 5.25%-5.50% range until the December 2025 meeting. The Waller development challenges this cautious view. In the coming weeks, we expect traders to increasingly use SOFR futures to bet on a more aggressive rate-cutting cycle in 2026. Look for growing interest in the March and June 2026 contracts, as these would show the impact of an earlier policy shift. This reflects Waller’s apparent preference for lower rates. Lower rates could also boost equities, which have been trading sideways throughout most of the summer. Markets rallied in late 2023 when the Fed first hinted at moving away from its rate hikes, adding over 10% to the S&P 500 in just two months. Traders are likely to start buying call options on the S&P 500 and Nasdaq 100 to prepare for a similar year-end rally.

Trading and Market Implications

However, this transition brings significant uncertainty, making volatility too cheap. With the VIX near a historically low level of 14, buying call options on the index provides a cost-effective way to protect against unexpected policy changes or political turmoil. Any political instability around the nomination is expected to cause a sharp rise in volatility. Waller’s appointment would also create two open governor positions for the administration to fill, potentially changing the Federal Open Market Committee’s voting majority for years. This signals a shift toward prioritizing growth over fighting inflation. As a result, we’re seeing derivative traders start to position for a weaker U.S. dollar. A more dovish Fed usually makes the dollar less attractive compared to other currencies. Buying put options on dollar-tracking ETFs like the UUP is a simple way to act on this belief. Create your live VT Markets account and start trading now.

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