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The Fed Vs President - Round I

After the US election, one of the major concerns of the investor community was the independence of the Federal Reserve. During the interviews, President Trump eased that concern by saying that he would chair Powell to complete his term. In the last 72 hours, various reports have surfaced that Chair Powell's termination is being discussed internally.


Given such a scenario the VIX spiked by 15% while equity indices fell by 2% with the dollar index reaching a low of seven weeks. As uncertainty and risk of such an event escalate, investors find it good to continue as a saviour as the price rose by 4% in the last twenty-four hours. 


What choices are at their disposal? The first and more subtle one that even finds support from Treasury Secretary Bessent, let him end his term and focus on tax cuts. The problem with that is, if and when an economic slowdown begins and the risk of inflation is higher rate cuts would not come through. In this, a hint came through last night when President Trump tweeted that Chair Powell will be blamed for it. 


The second and more volatile choice is to terminate or shadow Chair Powell, let the markets take the hit and thereafter rate cuts would reverse the damage. This is more tricky to implement and manage. But as seen with Tariffs it is not off the table. This means a probability of it being done will be there till his term completes in March 2026.


The risk of recession, inflation, tariffs and now this would make sure there are fewer buyers on each fall and more sellers on each rise. Though hedges are being put by most as it has been no one can perfectly hedge their positions in a high volatility period.

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