The upcoming Federal Open Market Committee (FOMC) meeting could witness a rare occurrence not seen since 1993: multiple governors voting against the Fed chair. This possible split reflects current monetary policy dynamics amid a leadership transition, with Chair Jerome Powell and most officials favouring a cautious approach.
Governors Christopher Waller and Michelle Bowman, both appointed by President Trump, might dissent due to their support for rate cuts aligning with Trump’s public advocacy for a looser policy. Waller frames any dissent as a principled action, not one of reflexive opposition, emphasising the importance of dissenting with the right reasons and avoiding potential “serial dissenting”.
Fed Leadership Dynamics
Some colleagues believe Waller’s dissent is his best chance to maintain his candidacy for succeeding Powell when his term ends. Waller has openly expressed interest in this position, indicating that this week’s actions could be crucial for his future prospects. Political dynamics within the Fed pose potential risks to its stability.
The potential for a politically motivated dissent at today’s FOMC meeting introduces a new kind of risk for us. We now have to price in the possibility that Fed policy could become less predictable and tied to political cycles. This kind of uncertainty often leads to higher volatility in the weeks ahead.
Given this, we should look at options markets, where volatility may be underpriced. The MOVE Index, which measures bond market volatility, has been relatively calm this month after the last CPI report showed core inflation easing to 2.8%. A dissent, especially one viewed as political, could easily cause a spike in interest rate volatility, making long positions in options attractive.
Potential Market Implications
The odds of a rate cut by the September meeting are currently low, with the CME FedWatch Tool showing just a 15% probability. A strong dissent from Governor Waller could make the market reconsider the path for rates later this year. This could create opportunities in SOFR and Fed Funds futures contracts for December 2025 and beyond.
We saw a similar situation when we look back at late 2018, when political attacks on the Fed’s independence coincided with a sharp market downturn and a VIX that spiked over 35. While history doesn’t repeat exactly, it serves as a good reminder of how markets react to this specific type of uncertainty. Buying some cheap, out-of-the-money puts on major indices could be a sensible hedge.
This development could also weigh on the U.S. dollar. A Fed that is perceived as potentially more dovish is typically negative for its currency. Shorting the dollar against currencies where the central bank remains more hawkish could become a more popular trade.
