US Treasury Secretary, Scott Bessent, emphasised the importance of observing inflation trends rather than focusing on a single figure, stating that inflation is not accelerating. He had yet to see the Consumer Price Index figures for the day. Bessent noted President Trump’s assurance that he would not dismiss Federal Reserve Chair, Jerome Powell, even though there have been past forecasting errors by the Fed.
Bessent discussed the crucial role of an independent central bank in policy development, revealing that the formal process for Powell’s successor has commenced. He mentioned there is a substantial pool of capable candidates from within and outside the Federal Reserve, with the final decision to happen at Trump’s preferred pace.
Stability In International Relations
On international relations, Bessent conveyed that relations with China are stable, anticipating a meeting with his Chinese counterpart in the coming weeks. He expressed no intention to expedite deals based on market deadlines. Despite the Fed and high-ranking officials reviewing data a day prior to its release, they refrain from commenting before official publication. This practice has previously led to speculation, such as when NFP data proved better than anticipated, following market concerns over Powell’s timing.
Based on these comments, our view is that the market is getting caught in a tactical trap, focusing on battles while ignoring the war. The message from Bessent is clear: we should not be whipsawed by a single inflation report. The market’s obsession with a tenth of a percentage point on the Consumer Price Index is a distraction from the larger trend. For perspective, the latest headline CPI reading showed a year-over-year increase of 3.3%, a world away from the 9.1% peak we saw in June 2022. The trend, as he notes, is unequivocally lower, and we should be positioning for a reality where the Federal Reserve might be behind the curve in the other direction.
For the coming weeks, this means we should treat any inflation-induced volatility spike as a selling opportunity. When implied volatility on S&P 500 options jumps in the hours surrounding the next data release, we see that as a prime moment to sell premium, perhaps through iron condors or short strangles on indexes and their related ETFs. The market has a short memory, and after the initial panic, it will likely revert to the mean, recognizing that one month’s data does not reverse a two-year disinflationary trend. The market is currently pricing in just one, maybe two, rate cuts for the remainder of the year according to CME FedWatch Tool data. Bessent’s hint that the Fed could be making a forecasting error now suggests this market pricing is overly hawkish, providing a cushion for risk assets.
Longer Term Strategy
The more critical insight, however, involves the longer-term game. His candid remarks about the process for Powell’s successor already being underway, combined with the caveat that the pick will happen on an unpredictable timeline, is the real source of future turbulence. This isn’t a risk for next week; it’s a structural risk for the fourth quarter and beyond. Historically, periods of uncertainty around the Fed chair—like the transition from Greenspan to Bernanke or Yellen to Powell—have been accompanied by rising market anxiety. With the CBOE Volatility Index (VIX) currently hovering in the low teens, a historically complacent level, the market is offering us a chance to buy long-term protection on the cheap. We should therefore be looking at buying longer-dated options, such as puts on major indices for late 2024 or early 2025, or even purchasing VIX call options. This creates a barbell strategy: we sell the short-term, data-driven fright while simultaneously buying the longer-term, policy-driven fear at a discount. The de-escalation with China he alludes to only reinforces this view, as it removes a source of immediate systemic risk and allows us to focus on the more predictable, domestically-generated volatility ahead.
