David Zervos, the chief market strategist at Jefferies LLC and a candidate for the Fed Chair position, is worried that the Federal Reserve’s current policies are too tight. He pointed out that inflation is still high and questioned how effective tariffs really are. Zervos also implied that Fed Chair Powell may not have complete independence. Additionally, the US Director of Federal Housing suggested there could be issues with FOMC member Lisa Cook, which might impact her role. This could lead to President Trump nominating someone new for the Federal Reserve Board.

Economic Policy Discussions

These updates come as monetary policy and its effects on the economy are key topics for market analysts and policymakers. The Federal Reserve’s actions are being closely watched. With possible changes in Fed leadership ahead, we might see a significant increase in market volatility. Uncertainty about Fed Chair Powell’s future and the nomination of someone who thinks current policies are “too restrictive” indicate that the VIX, which has been around a low of 14, is probably priced too low. It might be a good idea to buy VIX futures or long-dated call options on volatility ETFs to protect against potential policy shifts. This situation creates a puzzling outlook for interest rates that derivative traders can utilize. While David Zervos criticizes the restrictive policy, he also mentions “excessively high” inflation, making it unclear whether the next move will be to raise or lower rates. Currently, the SOFR futures market is predicting a 55% chance of a rate cut by the end of 2025, a belief that now seems too early and could change quickly.

Stagflationary Trade Environment

This environment suggests a stagflationary trade, as policy struggles to combat inflation without causing a recession. The latest core PCE reading for July 2025 was at a stubborn 3.3%, while Q2 2025 GDP growth was only 1.1%, highlighting this challenge. We see value in options strategies that could benefit from ongoing inflation, such as investing in commodity ETFs, while also hedging against a wider economic slowdown. For equity index traders, this new information calls for a more cautious approach. A tougher or less predictable Fed could lower stock valuations, especially with the S&P 500’s forward P/E ratio at a high 20. We recommend buying put spreads on the SPY or QQQ as a cost-effective way to safeguard portfolios against a possible market downturn in the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now