How economics and politics intersected in Kalshi’s latest highest-volume market.

Introduction:  In this series, the Kalshi contracts team analyzes past interesting markets. This time, Will and Xavier dicuss FEDNOM-21DEC01, a record-breaking market on the renomination of Jerome Powell.

To date, FEDNOM-21DEC01 was Kalshi’s busiest market, with over $200,000 traded! The market asked a simple question: will Biden replace the chair of the Federal Reserve Jerome Powell?

Background

The chair of the Federal Reserve is arguably one of the single most powerful individuals on the planet. Each word is carefully scrutinized by legions of financial analysts looking for the faintest glimmer of an indication about the Fed’s policy intentions. This attention is well-deserved: through a variety of tools ranging from large-scale bond purchases to interest payments on bank reserves to stress-testing to reserve requirements (and perhaps its most important power: expectations management), the Fed has the near-unilateral capability to affect the trajectory of nominal GDP. Many esteemed economists such as Milton Friedman, Ben Bernanke and Scott Sumner believe that the Fed was the primary culprit behind the Great Depression, and many others believe that the Fed’s policies are largely responsible for the Great Inflation of the 1970s and the Great Recession of 2008. With inflation currently at the highest levels seen since the early 1980s and the economy emerging from the COVID-19 induced downturn, all eyes were on whether a popularity-challenged Joe Biden would oust Powell, who was originally a Trump appointee but later gained a some bipartisan support for stewarding the economy during COVID-19 and rebuffing of Trump’s demands to adopt a more dovish attitude.

Powell’s nomination soon metastasized into an intra-caucus fight between different wings of the Democratic Party, with progressives arguing that Powell was unwilling to use the Fed’s vast powers to force banks to combat climate change and preferring a fellow Fed Governor, Lael Brainard. As such, not only was Powell’s nomination significant to econ-watchers, but pure politicos found the internecine fight a valuable bellwether for the influence of the left wing of the party. These traders watched like a hawk over every statement from the powers that be and traded accordingly. When Senator Elizabeth Warren called Powell a “dangerous man”, the price ticked up. When rumors emerged that Biden had settled on Powell, the price ticked down, only to re-emerge like a phoenix when the President invited both Powell and Brainard to the White House. All in all though, the contract maintained high volume and liquidity despite relatively modest changes in prices.

Outcome

In the end, Powell was announced as the nominee and the contract settled to No. The contract illustrates one of the core values of Kalshi markets: they can be a valuable information source about some of the country’s most pressing issues in a time where pundits have every incentive to dramatize and distort the truth. If you want to know what Biden will do, reading a news article that wants to turn everything into a reality-TV-style horserace won’t do: Kalshi’s markets (which maintained generally stable prices) are a far more honest dealer.