The upcoming Federal Open Market Committee (FOMC) meeting might see something unusual: several governors may vote against the Fed chair for the first time since 1993. This split reflects the current situation in monetary policy during a leadership change, with Chair Jerome Powell and most officials supporting a cautious approach. Governors Christopher Waller and Michelle Bowman, both appointed by President Trump, might disagree because they back rate cuts, aligning their views with Trump’s calls for a looser policy. Waller sees dissent as a principled stance, stressing the importance of dissenting for the right reasons and avoiding “serial dissent.”

Fed Leadership Dynamics

Some colleagues think Waller’s dissent is his best chance to be considered for Powell’s job when Powell’s term ends. Waller has shown interest in this role, and his actions this week may be crucial for his future. The political dynamics within the Fed could pose risks to its stability. The potential for a politically motivated disagreement at today’s FOMC meeting introduces new risks for us. We now need to consider that Fed policy may become less predictable and more influenced by political events. This uncertainty often leads to increased volatility in the weeks to come. Given this, we should pay attention to options markets, where volatility might be undervalued. The MOVE Index, which tracks bond market volatility, has been stable this month after the last CPI report showed core inflation dropping to 2.8%. A dissenting voice, especially seen as politically motivated, could trigger a spike in interest rate volatility, making long positions in options appealing.

Potential Market Implications

Currently, the chance of a rate cut by the September meeting is low, with the CME FedWatch Tool showing only a 15% likelihood. A strong dissent from Governor Waller could cause the market to rethink the rate path later this year, creating opportunities in SOFR and Fed Funds futures contracts for December 2025 and beyond. Looking back to late 2018, we saw a similar scenario when political pressure on the Fed’s independence coincided with a significant market downturn and a VIX that rose above 35. While history doesn’t repeat exactly, it highlights how markets react to this kind of uncertainty. Buying low-cost, out-of-the-money puts on major indices could serve as a smart hedge. This situation could also weaken the U.S. dollar. A Fed that seems more dovish usually has a negative impact on its currency. Shorting the dollar against currencies of central banks that are more hawkish might become a popular strategy. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now