Insights 
VT 
Treasury Secretary Scott Bessent has disclosed the final five candidates for the Federal Reserve Chair position. The candidates include Christopher Waller, Michelle Bowmann, Kevin Warsh, Kevin Hasset, and Rick Rieder.
These candidates have been frequently mentioned, which has led to a lack of market reaction. The next Fed Chair is expected to support interest rate cuts aligning with the President’s preferences.
Political Influence On The Fed
The current political influence on the Fed could be more evident as inflation and labour market issues intensify. Inflation is predicted to rise, possibly increasing pressure on the USD.
Despite current interest rate cuts, another reduction is anticipated shortly. This decision could impact market dynamics in the upcoming months.
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Potential Market Volatility
The announcement of five potential candidates for the next Fed Chair is creating a cloud of uncertainty. While the names are familiar, the key issue is the potential for a more politically-influenced Federal Reserve focused on cutting interest rates. This situation suggests that market volatility, which has been relatively subdued, is likely to increase significantly in the coming months.
We see a clear conflict brewing between the Fed’s mandates, which presents an opportunity for traders. The latest September 2025 jobs report showed continued resilience in the labor market, yet the most recent CPI data indicates inflation remains stubbornly above 3%, resisting the 75 basis points of rate cuts we’ve already seen since June 2025. This divergence between a strong economy and a dovish policy tilt is a classic recipe for a sharp market correction or policy reversal.
For derivative traders, this is a signal to prepare for bigger price swings rather than betting on a specific direction in the immediate term. Buying volatility through options, such as straddles on the US Dollar Index (DXY) or major currency pairs like EUR/USD, could be a prudent strategy. This allows profiting from a large move, whether it’s the dollar weakening from further rate cuts or strengthening as inflation forces the Fed’s hand.
Looking at interest rate futures, the market is pricing in another rate cut this week, which will keep short-term rates suppressed. However, the risk of rising inflation should be putting upward pressure on longer-term yields, potentially steepening the yield curve. This suggests that trades positioning for a wider spread between 2-year and 10-year Treasury yields could become increasingly attractive.
The US Dollar itself faces a tug-of-war between a dovish Fed in the short term and rising inflation in the medium term. While further rate cuts might weaken the dollar in the coming days, underlying inflationary pressures should ultimately provide support. We can use longer-dated call options on the dollar to position for this eventual strength while navigating the expected near-term weakness.
We only need to look back to the 2022-2023 period to see how quickly a central bank can be forced to abandon a dovish stance when inflation takes hold. The risk of a policy mistake is elevated, as a new Fed Chair may prioritize political loyalty over tackling inflation head-on. This historical precedent warns that the current path of rate cuts may not be sustainable if price pressures continue to build as expected.
