Oct 15, 2021 - Economy & Business

Next big bet: Wagers rush in on Fed chair pick

Illustration of a golden chair in a crystal ball.

Illustration: Aïda Amer/Axios

There are those speculating whether Fed chair Jerome Powell gets another term. Then there are those speculating with real money on the line.

Why it matters: The explosion in retail trading is one sign of the flush consumer's betting fervor. The amped up rush to wager on political outcomes — like who's next to lead the Fed — is another.

Here’s an indicator that interest in political betting has heated up: Per data provided to Axios by PredictIt, cumulative trading activity for the next Fed chair is double what it was the last time there was a similar market on the political trading platform.

  • That was in 2017, when then-Fed chair Janet Yellen was up for renomination. (At this point then, Powell led the market, though Kevin Warsh was ahead a few days prior.)

The big picture: PredictIt is the site most closely watched by traders, as far as prediction markets go.

  • Those platforms are valuable because in real-time, it "distills the consensus into a single number," says Bianco Research's Jim Bianco, who regularly tweets out updates on the Fed chair betting market. (Bianco isn't trading here, though he has been active on PredictIt before.)
  • For instance, buying in on Powell's renomination costs 73 cents (and if you're right, you win $1 — less fees). Put another way, the prediction market sees a 73% chance Powell gets another four years.

Worth noting: The Commodity Futures Trading Commission has strict rules for political trading platforms like PredictIt, which fall under the regulator’s purview.

  • One of them: No user can put more than $850 on a single contract — a "yes" or "no" on a certain political outcome — and just 5,000 people can hold shares in any contract at one time.
  • In other words, mega-bets on the next Fed chair aren't happening on PredictIt. That happens elsewhere, indirectly (like interest rate futures).

The backdrop: Powell’s term expires in February. Biden hasn’t said whether he‘ll re-up Powell — who isn’t favored among progressives — for a second term.

  • His chances slumped amid vocal opposition in Washington that’s gotten louder since the scandal over some Fed members' financial holdings, PredictIt shows.
  • The most active trading day since this market's inception on PredictIt was when Sen. Elizabeth Warren (D-Mass.) said earlier this month she would not support a Powell renomination. The second most active day? Last week, when Warren doubled down.
  • Powell still has the best odds, but they are off their highs. Contracts on Lael Brainard, who currently serves on the Fed board, spiked. Other names — like former TIAA CEO and a one-time Fed vice chairman Roger Ferguson — have recently come into the fold.

Between the lines: “There are times when what’s going on in prediction markets doesn’t seem totally consistent with other markets where people are putting billions of dollars to work,”says Jens Nordvig, who previously led fixed income and currency strategy at Nomura before founding his own firm, Exante Data.

  • In the case of the Fed chair, though, “people’s probabilities have shifted, and that’s reflected in PredictIt, and also reflected in how people think about what are the risks to interest rates,” says Nordvig, who notes those moves can happen in tandem.

What to watch: An announcement on Powell’s fate is due any day now, if history is any guide: The last three presidents didn't unveil Fed head decisions later than October or November.

  • Biden's announcement will end the suspense, but it won't trigger winnings for prediction market traders. That only happens when the Senate OKs the pick, because of the way the question that the market's built on is phrased: "Whom will the Senate next confirm as Chair of the Federal Reserve?"

Editor's note: This story has been corrected to reflect Roger Ferguson was the former TIAA CEO, not chairman.

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