Fed’s Waller is a leading candidate for the new Fed chair, as per Bloomberg. The Trump team favours Waller due to his forecast for Fed rate cuts, and he has met with the Trump team, without direct meetings with Trump.
Trump claims to uphold the Fed’s independence, but recent discourse from the White House suggests the Fed’s actions align with political divides, based on who nominated the Fed governors. Trump aims to shift this political lean towards his stance, viewing a new Fed chair appointment and a replacement for Kugler as advantageous. If Waller is appointed chair, it creates two governor positions to be filled.
Market Expectations for Fed Governor Waller
The news that Fed Governor Waller is a top contender for the new Fed Chair is shifting expectations. We see this as a clear signal that the central bank could become more dovish much faster than anticipated. This potential change is not yet fully priced into the market, creating an opportunity.
Right now, futures markets are only pricing in a single 25-basis point rate cut by the end of the year. For instance, data from the CME FedWatch Tool shows a nearly 60% probability that the Fed Funds Rate will remain in its current 5.25%-5.50% range through the December 2025 meeting. This Waller development directly challenges that cautious outlook.
In the coming weeks, we expect traders to increasingly use SOFR futures to bet on a more aggressive cutting cycle in 2026. Look for growing open interest in the March and June 2026 contracts, as these would capture the effect of an earlier-than-expected policy pivot. This is a direct play on Waller’s perceived preference for lower rates.
This potential for lower rates is also bullish for equities, which have been trading sideways for most of the summer. We saw how markets rallied in late 2023 when the Fed first signaled a pivot away from its hiking cycle, a move that added over 10% to the S&P 500 in just two months. Traders will likely begin buying call options on the S&P 500 and Nasdaq 100 to position for a similar year-end rally.
Trading and Market Implications
However, the transition itself introduces significant uncertainty, which means volatility is currently too cheap. With the VIX hovering near a historically low level of 14, buying call options on the index offers an inexpensive way to hedge against confirmation battles or unexpected policy shifts. Any political turbulence surrounding the nomination will likely cause a sharp spike in volatility.
The bigger picture is that Waller’s appointment would create two vacant governor seats for the administration to fill. This could fundamentally reshape the Federal Open Market Committee’s voting majority for years to come. It signals a potential structural shift toward prioritizing growth over inflation fighting.
Consequently, we are seeing derivative traders begin to position for a weaker U.S. dollar. A more dovish Fed typically reduces the dollar’s appeal relative to other currencies. Buying put options on dollar-tracking ETFs like the UUP is a straightforward way to express this view.
