Original Title: "Regarding the 'Firing of Powell': Prediction Market Listens to Trump, While Rates Market Listens to Brainard"

Original Author: Long Yue, Wall Street News

Despite escalating rumors of Trump firing Federal Reserve Chairman Powell, the two major "barometers" of the financial market have given completely different signals.

Data shows a clear discrepancy between the prediction market and rates market on the issue of Powell's departure. The latest development is an article by Wall Street News stating that Powell will be interviewed on July 16 (Wednesday), and Trump has drafted a dismissal letter. This news once again boosted the betting odds on Polymarket regarding "Powell being fired by 2025."

However, the rates market's level of concern about Powell's early departure is notably lower than the probability shown on the Polymarket betting platform. The Rates Market refers to the interest rate derivatives market, especially the federal funds futures market, which reflects expectations of future Fed rates through trading prices.

Specifically, after stronger-than-expected US employment data was released, the rates market reduced its bets on a rate cut. Currently, the rates market expects the Fed to cut rates by 43 basis points by the end of the year, compared to a cut of 67 basis points as of the end of June. More importantly, US Treasury Secretary Brainard previously revealed in an interview that he did not fully support President Trump's sharp comments on the Fed, providing a stable anchor for the rates market with his more moderate stance.

As a result, participants in the prediction market continue to reinforce Trump's "firing remarks," while traders in the rates market choose to believe Brainard's cautious stance and economic data showing ongoing inflation risks.

Chart showing the divergence in trends between the rates market and the prediction market

Increasing Market Divergence

In fact, the prediction market and rates market have been diverging since early July.

Prior to early July, the implied probability of a rate cut in the rates futures market closely matched the trend of Polymarket's odds on Powell being fired. However, this synchronous relationship was broken on July 2.

On July 2, Trump publicly demanded Powell's resignation, causing Polymarket's related betting odds to soar. However, at the same time, the short-term rates market was largely unaffected. Additionally, on July 3, the employment data was better than expected, leading to a sell-off in the rates market as traders began to lower their rate cut expectations. On the same day, Treasury Secretary Brainard, in an interview, refused to fully endorse Trump's remarks on the Fed. His statements further reinforced a cautious market sentiment. Since then, the two curves have moved in different directions.

According to Bloomberg Macro Strategist Simon White's analysis, the forecasting market typically takes political rhetoric as a benchmark, while the rates market pays more attention to economic fundamentals and policy signals.

Interest Rate Market Pricing Logic: Data and Signals First

The performance of the rates market clearly indicates that traders tend to filter out political "noise" and focus on economic "signals." Recent U.S. employment data suggests ongoing economic resilience and inflation facing upside risks, directly weakening the case for a sharp Fed rate cut in the near term.

Data shows that the rates market currently expects the Fed to cut rates by 43 basis points by the end of the year, which is significantly lower than the 67 basis points predicted at the end of June.

The core driver of this change, apart from economic data, is Treasury Secretary Janet Yellen's stance. As a key figure connecting the White House and the financial markets, her more moderate remarks have been interpreted by the market as a crucial signal of policy continuity, tempering Trump's fiery rhetoric.

However, strategist Simon White points out that if any market participant believes Trump's political will ultimately reign supreme and successfully install a more "dovish" Fed chair, then Polymarket's odds may be closer to the truth.

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