It seems to an outsider like me that Fed independence is the main narrative people want to talk about right now.
“Will Trump fire him?” “Will the new chair bend the knee?” “Is the dollar toast?”
To me, these questions miss the point.
If we look at history objectively, the reality is that 90% of the time, the Fed does exactly what the political leadership and the asset markets want them to do. The interests align perfectly.
The only time independence actually matters is when inflation is ripping higher, and the central bank has to inflict pain on the economy to kill it.
Despite having a reflation view for 2026, I think that is not where we are right here right now.
The real story isn’t about whether Powell gets fired or who the new nominee is. The real story is that we are witnessing a massive acceleration in policymakers trying to control financial markets.
Imagine a suspension system on a car that is so stiff, so controlled, that you can drive over a crater and not spill your coffee. That is what the government is doing. They are intervening so frequently and so forcefully that they have distorted prices.
They are trying to outlaw volatility. And when you try to suppress volatility, you usually end up creating a bomb.
But before getting into vol-talk, let’s take a look at the FOMC meeting this week.
You have the Department of Justice firing off subpoenas. You have a hostile administration breathing down the Fed’s neck. I expect Powell’s press conference to be chaotic, and noisy.
Powell isn’t going to address the subpoenas. He isn’t going to tell us if he plans to stay on as a governor after his chairmanship expires in May (which he could do, just to spite them). He is going to give us the same old “we are data dependent” schtick.
But the market isn’t waiting for the press conference. The market has already decided that rate cuts are off the table until June because the recent economic data looks okay.
Right now, the curve is pricing in two cuts over the next 18 months. I think we could get substantially more cuts than that because of government pressure.
Trump is likely to announce his nominee for Fed Chair this week. The prediction markets are leaning toward Kevin Warsh, and Rick Rieder. Kevin Hassett is fading.
Honestly, it doesn’t matter who’s going to take the seat. Any Trump nominee is going to be a dove. They are going to want to slash rates to as low as possible if they can get away with it.
The real battle is the math of the FOMC votes.
Let’s run the numbers. A new Chair faces a math problem: with Powell and Cook still on the board, the ‘Dove-Hawk’ balance is precarious. But if they are forced out? The new Chair isn’t just a leader; they’re a dictator with a six-vote lock on aggressive cuts.They would need to convince the “data dependent” crowd—the centrists—to get a cut.
But if Powell and Cook are forced out? The new Chair has a lock. They will have six votes in their pocket. They will cut rates aggressively.
Here is the bottom line: Despite all the threats, the tweets, and the demands for fealty, Fed independence comes down to what Powell does next. Until he shows his cards, we don’t know if Trump is driving the bus or if the committee is actually “data dependent.”
In my opinion, we should not cut rates any further from here, but regardless of my opinion, I think we will see cuts to 2.75-3.0% by year-end.
If the Trump loyalists take over completely, they will cut even more than that. They will cut more than they should. They will pour gasoline on a fire that is already burning.
They will make the story of 1967 come back.
Ok. Now let’s step back and look at “Government Put”.
Since the crash of 1987, we have been on a one-way train. Every time the market gets a tummy ache, the Fed or the Treasury rushes in and bailouts.
We have moved past “moral hazard.” We are now in a “leverage up and buy the dip” culture because the government has effectively insured the downside.
Since the “Geneva Deal”—where Trump served tacos and kicked off this face-ripper rally—the intervention has gone exponential.
- Reserves: The Fed won’t let banking reserves fluctuate naturally; they just pump more liquidity into the system.
- Currencies: As recently as Friday, Japan threatened intervention in their JPY market after both BoJ and MOF have tweaked their balance sheet policy and issuance policy respectively.
- Everything Else: The US is meddling in Argentina, global energy markets, and mortgages.
Every week there is a scary geopolitical headline, followed by a “walk back.” It’s a theater.
I have no edge in judging politics. I just watch the machine.
And the machine is overdamped.
The administration is dampening volatility on both sides. They won’t let markets crash, but they will also lean against a rally if they feel like it. When you remove risk from the system, what happens? People leverage up. When people leverage up, prices rise.
The government wants to control all prices. But when intervention exceeds market risk, the risk has to go somewhere.
It’s going into Gold & Silver.
Gold (Silver) is a turbocharged short-USD trade. The dollar is down 11.5% since the inauguration, but gold is the real release valve for this pressure.
An overdamped system is like a car with incredibly stiff shock absorbers. It’s great for a smooth road. You feel like a genius. But the underlying springs—the animal spirits and real market forces—are weak. The system is extremely fragile.
If the shock absorbers shatter, 2026 could see historic moves in either direction.
Realized volatility has collapsed across the board.
- Currency volatility has been cut in half.
- Bond volatility is being crushed by intervention.
- Equity volatility is nonexistent.
This is what an overdamped system looks like. It’s a smooth road. It feels great.
But if we hit a big bump? The shock absorbers might shatter.
Since the Geneva Deal, selling puts has been free money. There has been virtually no pain for the dip buyers. Look at the drawdown streaks. The worst we have seen is a shallow 5-8 day decline.
So, where do we go from here? I still see the path for 2026 like what I laid out in the 2026 outlook
- The Smooth Road: We keep grinding. Shallow selloffs, shallow rallies. Boring. The government successfully manages the price.
- The Melt Up: Volatility collapses to unsustainable levels, people panic-buy, and risk assets go parabolic.
- The Accident: We hit a bump that the government can’t fix. Realized vol spikes. The “short vol” crowd (which is basically everyone right now) gets carried out on stretchers. We get a sharp 6-8% correction that finally breaks the “buy the dip” psychology.
In short, things are bullish until they aren’t.
The trade during the last part of 2026 (or 2027) is painful, but necessary. You have to be long volatility.
When the crack happens—and it will happen—you want to be the one holding the insurance, not the one selling it for nickels.
Until then, stay short USD, stay long risk especially EM Equities, and FX.