Trump Signals "Shadow Chair" Strategy as Traders Anticipate Swift Fed Rate Cut in 2026

TradingKey - U.S. interest rate traders are betting heavily that the Federal Reserve will quickly turn dovish after current Fed Chair Jerome Powell's term ends in May 2026. The volume of futures trades linked to this bet hit a record high on Monday and continued to grow on Tuesday.

Traders are wagering that whoever Trump appoints to succeed Powell will lead the Fed in implementing an almost immediate rate cut, starting at the first policy meeting in June 2026 after taking office.

Strong Demand for Futures Contracts as Market Bets on Steady Rates

Over the past few months, Trump has been urging Powell to cut rates to reduce borrowing costs, yet since Trump's inauguration this year, the Fed has remained inactive. On June 6th, Trump announced that he would soon unveil his pick for the next Fed Chairman and reiterated that a competent Fed Chairman would lower rates, emphasizing that Powell should do so. On June 12th, Trump again criticized Powell, demanding a rate cut, claiming that a two-point reduction could save the U.S. $600 billion annually in interest expenses.

The market widely expects the Fed to hold rates steady at Wednesday’s meeting, possibly lowering this year’s rate cut expectations to counter the upward price pressure caused by tariffs. Currently, market attention is focused on the Fed officials' rate dot plot predictions, expecting a single 25 basis point cut in 2025. The March forecast median had projected two 25 basis point cuts.

Traders are currently betting that the Federal Open Market Committee (FOMC) will cut rates by about 43 basis points by the end of the year, with the earliest potential cut in September by 25 basis points, though more likely in October. These bets are concentrated in the futures market tied to the Secured Overnight Financing Rate (SOFR), an essential tool for assessing Fed policy expectations. After Trump indicated this month that he would soon announce his chairman pick, SOFR-related contracts quickly drew trader attention.

Traders are shorting SOFR futures contracts expiring in March 2026 and going long on those expiring in June 2026, causing some disturbance in the futures market. Due to the heavy selling of March contracts, their relative price has weakened significantly compared to December 2025 and June 2026 contracts, driving the relative price spread for March 2026 futures to its highest level since January.

Statistics show that this trade reached a volume of 108,649 contracts on Monday, with open interest for March and June contracts rising to the highest level within this policy cycle, reflecting strong demand.

Trump May Nominate a Dovish Successor, but Fed Independence Questioned

Steven Barrow, Head of G10 Strategy at Standard Bank, pointed out that Trump might select a successor clearly supportive of accommodative monetary policy, though securing Congressional approval could be more challenging.

Peter Conti-Brown, a Fed historian at the University of Pennsylvania, stated that what Trump says is less important than whether he will take steps to influence the Fed’s rate decisions, such as appointing Powell’s successor.

Bessent proposed last October the concept of a shadow chairman, suggesting that Trump could pre-nominate the next chairman. Once this chairman and forward guidance are in place, no one would truly care about Powell’s statements anymore.

Will Denyer and other economists at Gavekal Research indicated that this could lead investors to focus simultaneously on signals from both the "shadow" chairman and Powell, potentially further undermining confidence in U.S. policymaking.

Nick Timiraos, often referred to as the "Fed whisperer," suggested that Trump's aggressive intervention with the Fed might weaken investors' confidence in the next chairman. There is market concern that regardless of who succeeds Powell, the Fed’s independence will be in question, and the efficacy of future monetary policy may be undermined.