Some Traders Predict Powell Will Remain at Fed Despite Accusations

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

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Abstract: Traders on Kalshi predict that Jerome Powell will be renominated as Fed Chair, despite emerging accusations of insider trading and opposition from Progressive Democrats.

The Scene:

All of Wall St. is waiting with bated breath on President Biden’s decision to renominate or replace current Federal Reserve Chairman Jerome Powell. Progressives want Powell gone, and in his place, they want a Fed Chair who’s more concerned with issues like climate change and racial equity. There’s also news that Powell sold more than $5 million in shares before stocks slid in 2020, potentially setting up accusations of insider trading.

The renomination battle could not be coming at a more precarious moment. For the first time in decades, inflation is picking up: the CPI is overshooting expectations and year-over-year inflation is running at over 5%. This change may not be transitive: monthly inflation in both October and November is predicted to be above 0.3%.

The economic outlook is also gloomy. The continued spread of COVID-19 has combined with severe supply chain disruptions to tamp down the animal spirits which ran rampant this summer. In August, Q3 Real GDP was projected to grow at above 6% with over 80% confidence, now there’s a 96% chance that it will miss that target. The likelihood of a recession this year has also increased, from 10% to 20%.

The current situation could quickly turn into economists' worst nightmare: stagflation, when inflation and unemployment increase simultaneously.

Why it matters:

As Fed Chair, Powell has been dovish, favoring easy monetary policy in support of full employment, and resisting calls to raise interest rates despite increases in inflation. At the same time, he’s refused to play with Progressives, stopping short of any commitment to take climate change or racial equity into account when setting monetary policy.

Powell proved his crisis-management abilities over the course of the pandemic, and the next phase of the economic recovery will be especially difficult to navigate. Any replacement for Powell will probably differ in some key areas, so investors are watching this renomination saga with interest. 

What Might Happen

The likelihood that Powell is renominated is holding at around 80%, though it briefly crashed on news of potential insider trading. This means investors in the stock and bond markets can probably relax a little bit.

This probability is the product of investors trading on Kalshi, the first federally regulated market for event contracts. Investors buy “yes” or “no” on a market asking “Will Jerome Powell be Replaced?”, and they make a return based on whether their trade was correct.

Kalshi has markets for a wide variety of events, providing forecasts for future levels of taxes, inflation, unemployment, and interest rates. Investors can also trade on whether the Fed will taper its bond purchases, whether the debt ceiling will be raised, and whether the FDA will approve a COVID-19 vaccine for children under 12.

Kalshi markets can also help investors make decisions about other parts of their portfolio, because their forecasts give them more information about what will happen in the future. Millions of variables affect the price of a stock or the level of the stock market, but an event contract directly isolates the probability of the underlying event. 

Incorporating Kalshi’s event contracts into your portfolio is extremely useful and can be done at kalshi.com.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.