By Steven M. Sears

Jerome Powell blinked.

The September meeting of the Federal Reserve's interest-rate setting committee is now more difficult to trade than is understood.

After relentless criticism from President Donald Trump, who wants lower interest rates, the Federal Reserve chairman surprisingly expressed an openness to something he had resisted.

Powell's recent speech at the Fed's symposium in Jackson Hole, WY., contained the usual arias about relying on economic data to formulate policy but the chairman demonstrated that he may no longer be able to resist the president. Powell's brief mention in his speech that restrictive monetary policy may merit easing has sent stocks higher and options volatility lower. The futures market has solidified rate-cut expectations, the first of which is expected when the Federal Open Market Committee's two-day meeting ends on Sept. 17.

On Monday, Trump announced that he was removing Lisa Cook from the Fed's board, an action that positions him to assert even more control of the nation's monetary policy.

Investors are well advised to prepare for price volatility to erupt from the potential disconnect between investors and Powell.

If interest rates are lowered, stocks should rally. The ripple should even spread to markets all around the world and seep into non-equities as U.S. interest rates influence bond, currency, derivatives, and commodity pricing.

Lower U.S. rates also should boost the U.S. economic outlook, sparking predictions of accelerated economic activity since borrowing expenses would decrease. The moribund housing market might even begin to recover.

However, the opposite risk also exists. If rates are lowered, stocks could decline, and options volatility could increase should investors fret that the Fed is politicized, as evidenced by Trump's efforts to fire Cook. After all, Trump has expressed concerns about the politicization of government economic data. Conversely, if the Fed doesn't raise rates, say because new economic reports argue against looser policy, investors might have a temper tantrum and pummel markets.

Until the market trend is defined, aggressive investors can play both sides. To preposition for the convergence of investor sentiment and economic policy, investors can consider put and call spreads on the iShares Russell 2000 exchange-traded fund (ticker: IWM). The ETF's constituents generate most of their revenue in America, making it a proxy for the U.S. economy.

With IWM at about $234, the September $230 put could be bought for $3.29, and the September $220 put could be sold for about $1.16. If IWM is at $220 at expiration, investors realize a $7.87 maximum profit.

To play the upside, the September $235 call could be bought for about $5.38, and the September $245 call could be sold for about $1.45. If IWM is at $245 at expiration, the maximum profit of $6.07 is realized.

During the past 52 weeks, IWM has ranged from $171.73 to $244.98. For the year, IWM is up about 6%, lagging behind its big brother, the S&P 500 index, whose revenue is largely international.

It is always preferable to have a directional view, but Trump's use of tariffs creates uncertainty that is unprecedented in the modern economy.

In the past 80 years, few leaders, if any, have embraced tariffs with Trump's passion. The world's financial and manufacturing capabilities have been linked since World War II ended in 1945. Governments have generally believed international economic integration prevents major wars.

Trump's maverick policies may prove correct, but it is hard to ignore that Powell has seemingly bowed to political power. Everyone has an opinion on the matter, and these trades put a dollar sign on the outcome.

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(END) Dow Jones Newswires

August 29, 2025 21:30 ET (01:30 GMT)

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