Research Note - Macro & Rates Desk

Key Takeaways

• Political continuity is a 50/50 proposition, creating the market's dominant risk premium and suppressing economic volatility.
• Monetary policy is priced with near-total certainty (96% pause), creating a crowded trade vulnerable to political catalysts.
• A 38% chance of a Hassett Fed nomination under Trump is a leading indicator for rising fiscal dominance concerns.
• Recession risk is priced at an extraordinarily complacent 1%, offering cheap tail protection.
• The interplay suggests positioning for a spike in rate volatility and underweighting long-duration bonds.

Executive Summary

Current prediction market activity reveals a stark divergence between high-conviction monetary policy expectations and extreme political uncertainty. With over $9.8M in volume, the market pricing a 50% probability of Donald Trump exiting office before Jan 1, 2026, represents the single largest risk premium in our coverage universe, eclipsing even the most heavily traded Federal Reserve and macroeconomic contracts. This political overhang is suppressing volatility in traditional macro markets, with near-certainty (96%) priced for a Fed pause in January 2026 and minimal expectations for recession (1%) or aggressive rate cuts. However, embedded within this calm are significant asymmetric bets, particularly regarding Fed leadership under a potential second Trump term, where Kevin Hassett's nomination as Chair is priced at a substantial 38%. Traders should position for a volatility regime shift: political resolution could trigger rapid repricing in interest rate and growth markets currently trading with extraordinary complacency.

Market Overview & Dominant Themes

The aggregated data from Kalshi presents a market grappling with two distinct timelines: the immediate certainty of the Fed's path over the next 12-18 months, and the profound uncertainty of the political landscape through 2025 and beyond.

Political Supremacy in Risk Pricing: The "Donald Trump out this year?" market is the dominant feature, with its 50% probability and $9.8M volume indicating that political continuity is seen as a coin toss. This is unprecedented for an incumbent this far from an election. Historically, prediction markets have assigned very low probabilities (<10%) to a sitting president not finishing a term, barring extraordinary circumstances. The current pricing suggests the market perceives a substantially elevated risk of resignation, incapacitation, or removal. This single contract is absorbing risk capital that would typically flow into economic forecasts, creating a distortion.

Monetary Policy Complacency: In stark contrast, Federal Reserve-related markets exhibit extreme confidence. The 96% probability of a 0bps hike in Jan 2026 is essentially a maximum conviction bet. Combined with only a 6% probability of two rate cuts (50bps total) by the market's cutoff, this paints a picture of a market expecting a prolonged hold at the terminal rate, with easing cycles pushed well into 2026 or later. The 1% probability on "Powell leaves before 2026?" further cements the view of Fed leadership stability in the near term.

Disconnected Asset Correlations: The Bitcoin markets (1% for $130K and $150K) show that despite high volumes (~$14.3M combined), speculative crypto mania is not being priced for 2024. This decouples digital asset sentiment from both political risk and interest rate expectations, suggesting crypto is trading on its own idiosyncratic cycle.

Deep Dive: Key Markets & Actionable Insights

1. The Trump Tenure Market (50% Probability, $9.8M Volume)

• Analysis: A 50% binary probability is the market's equivalent of "maximum uncertainty." This is not a mild over/under; it signifies traders believe the outcome is genuinely unpredictable based on current information. The volume indicates this view is held with significant capital behind it.
• Historical Context: For comparison, similar markets for President Biden exiting early have typically traded below 20% during his term. The 50% level for Trump is akin to probabilities seen during the peak of the Mueller investigation or the January 6th hearings, but sustained over a longer period.
• Actionable Insight: This market acts as a massive volatility sink. A resolution to "Yes" would trigger seismic shifts across all policy-sensitive markets (rates, fiscal, regulation). A resolution to "No" would likely lead to a sharp compression of risk premiums elsewhere. Traders can use this as a hedge or a volatility play. Pair Trade: Consider going long volatility in rates markets (via options on Fed Funds futures) while holding a position in this Trump contract, as a resolution will spike correlated volatility.

2. Federal Reserve Policy Suite (Pause: 96%, Cuts: 6%, Powell Exit: 1%)

• Analysis: The market has fully internalized a "higher for longer" narrative, with an almost perfectly priced pause. The minimal probability of two cuts suggests no expectation of a policy error necessitating rapid easing or a severe economic downturn.
• Catalyst Watch: The primary catalyst for repricing is the political market. A "Yes" on Trump exiting would likely see the probability of rate cuts rise, as uncertainty could prompt a more precautionary Fed. A "No" (Trump remains) coupled with a Republican sweep in November could see probabilities of hikes enter the market, pricing in more expansionary fiscal policy.
• Actionable Insight: The asymmetry lies in the cut side. With cuts priced at only 6%, any softness in inflation or labor data could cause a disproportionate move. However, the dominant political risk currently suppresses this. Fade the Consensus: The 96% pause is a crowded trade. Selling this contract (i.e., betting the probability will fall from 96%) offers a positively skewed payoff; only a small probability needs to be reallocated to hikes or cuts for the position to profit.

3. Trump Nominates Hassett for Fed Chair (38% Probability, $5.0M Volume)

• Analysis: This is the most significant leadership prediction within the Fed complex. A 38% probability for a specific individual a year before the potential nomination event is strikingly high. It indicates the market views Hassett, a former Trump economic advisor, as the clear frontrunner should Trump have the appointment power.
• Implications: Hassett is generally viewed as more dovish and politically aligned than Powell. His nomination would likely be perceived as reducing Fed independence, potentially leading to a steeper yield curve (higher long-term inflation expectations) and a weaker dollar. The 38% price is a material risk premium being added to long-dated yields.
• Actionable Insight: This market is a direct hedge against or bet on the politicization of the Fed. Strategic Position: Use this contract as a cleaner proxy for "Trump policy impact on the Fed" than the binary election market. A rising probability here is a direct signal to short long-dated Treasury bonds (e.g., TLT).

4. Recession in 2025 (1% Probability, $4.7M Volume)

• Analysis: This is the most complacent reading in the macro suite. A 1% probability is a near-total dismissal of recession risk within the 18-month window. This aligns with the "no cuts" Fed view but stands in contrast to typical leading economic indicators which often show non-zero recession probabilities.
• Risk Factor: The extreme complacency is itself a risk. The market has no buffer for negative growth surprises. The correlation risk is high: if the 1% probability begins to rise, it will likely coincide with a sharp drop in the "Fed Pause" probability and a rise in "Fed Cuts."
• Actionable Insight: This contract offers high-conviction, negatively skewed convexity. Asymmetric Bet: Buying this contract (betting Yes) is cheap volatility. A modest shift in the economic outlook could see this probability jump to 10-20%, offering a 10x-20x return on the initial stake, while the maximum loss is capped at 100% of the stake.

Synthesis & Cross-Market Implications

The interplay between these markets reveals a core narrative: The market is discounting economic cyclical risk in favor of political regime risk.

1. The Fed Put is Politically Constrained: The extreme certainty around a Fed pause suggests traders believe the central bank is either out of ammunition or unwilling to react to normal economic cycles until the political fog clears. The Fed's reaction function appears to be on hold.
2. Fiscal Dominance Foreshadowing: The high probability of a Hassett nomination in the event of a Trump victory is a leading indicator for markets pricing a shift toward "fiscal dominance," where monetary policy becomes subordinated to Treasury financing needs and political objectives. This is bearish for long-term bond prices.
3. Volatility Suppression and Impending Release: The current state represents suppressed volatility. The VIX (equity volatility) equivalent in these prediction markets is low for economics (tight ranges on rates, recession) but high for politics. This divergence is unstable. A catalyst from either domain will cause volatility to spill over. The most likely vector is from politics to economics.
4. Asset Allocation Signals: The signals point to:
   • Underweight Long-Duration Bonds: Risks are skewed toward higher yields (political fiscal risk, Fed leadership change).
   • Neutral on Cyclical Equities: Recession is priced out, but political uncertainty caps upside.
   • Hold Tail Hedges: The cheap cost of recession and political volatility contracts provides efficient portfolio insurance against low-probability, high-impact events.

Risk Factors & Catalysts

Near-Term Catalysts (Next 3-6 Months):

• Political Clarity: Any legal resolution regarding Trump's eligibility or health disclosures.
• Economic Data Surprises: A string of hot inflation prints could force the "96% Pause" market to price in hike risk. Conversely, a sharp rise in unemployment could revive recession and cut probabilities.
• Fed Communication: Any shift in the Fed's balance of risks language could crack the monolithic pause narrative.

Structural Risk Factors:

• Correlation Breakdown: The current equilibrium assumes political and economic markets are semi-independent. A major political event that immediately impacts consumer confidence or energy prices would force a rapid re-correlation.
• Liquidity Distortion: The enormous volume in the Trump contract may be distorting price discovery in smaller, less liquid macro markets.
• Definitional Risk: The "Trump out" market includes resignation, removal, and incapacitation. These are fundamentally different events with different market implications, creating a blended risk that is difficult to hedge specifically.

Desk Recommendations

For Directional Macro Traders:

1. Establish a Short Base in Long-Dated Interest Rate Markets: Use futures or ETFs to express a view that the "higher for longer" narrative will evolve into "higher with an upside risk." The 96% pause probability and 38% Hassett risk support this.
2. Buy Cheap Tail Hedges: Allocate 0.5-1.0% of portfolio risk capital to the "Recession in 2025" (Yes) and "Trump Out" (Yes) contracts. This provides asymmetric payoff in volatile scenarios.

For Relative Value/Volatility Traders:

1. Fade the 96% Fed Pause: Sell the "0bps Hike in Jan 2026" contract. The risk/reward is favorable for a small move away from certainty.
2. Monitor the Trump-Hassett Correlation: Track the relationship between the "Trump Out" and "Hassett Nomination" probabilities. A strengthening positive correlation (Trump staying = Hassett odds up) would confirm the fiscal dominance trade. A negative correlation would suggest other factors at play.
3. Calendar Spread on Political Volatility: Given the high uncertainty centered on 2025, consider strategies that are long 2025 political volatility (via these prediction markets) and short 2024 economic volatility (via more traditional VIX-linked products), betting that political shocks will dominate the narrative.

Conclusion: The prediction markets are sounding a clear, if unusual, alarm. The largest risks to the macro landscape are no longer traditional economic cycles but proximate political events. The remarkable complacency in economic forecasts is built upon a foundation of political suspense. Traders must navigate this by hedging the political binary directly or positioning for the violent re-correlation of economic assets when the political fog lifts. The current market structure offers rare, clean instruments to express these views, with the Trump tenure contract acting as the central pivot for all other risks.

Market Analysis

Donald Trump out this year? 📉

Current Probability: 50.0%

The cornerstone market. A true coin-flip probability with massive volume indicates deep, capitalized uncertainty about political stability. Acts as a volatility sink for all other markets.

Fed Pause in Jan 2026 📉

Current Probability: 96.0%

Priced to perfection. Represents extreme consensus. Asymmetric risk skewed to the downside (probability can only fall 96 points but rise only 4).

Hassett Fed Chair Nomination 📉

Current Probability: 38.0%

High implied probability for a specific future event signals strong market conviction on this personnel outcome, with significant implications for Fed independence and inflation expectations.

Recession in 2025 📈

Current Probability: 1.0%

Extreme complacency. A cheap option on a regime shift. Any deterioration in data will cause nonlinear repricing.