A simple smile from Donald Trump worries investors. The President of the United States admitted this week that he had narrowed down the list of the next chairman of the Federal Reserve to replace Jerome Powell to just one candidate. Although he will delay the official nomination until after the Christmas break, the Republican president smiled slightly when asked by reporters if his nominee was Kevin Hassett, the director of the White House Economic Council and one of his top advisers.
Hassett’s apparent loyalty to Trump and his predictable docility toward the president are raising suspicion among asset managers at an uncertain time. The high debt of the American economy is compounded by warnings about high stock market valuations, disproportionate spending by large technology companies on artificial intelligence or private credit. Reports from analysts speculating about a market-inflating bubble in the AI sector are circulating on Wall Street daily.
The nomination of the next Fed chairman also comes as clouds gather on the horizon, as two opposing forces make it unclear whether it is a momentary mirage or the prelude to a more virulent storm. Signs of a deterioration in the labor market are increasingly evident, while price pressure continues to ease. To solve the first problem, rates would have to be lowered; to face the latter, pick them up.
Meanwhile, asset management giants have warned the Treasury about Hassett. The candidate is expected to promote more aggressive rate cuts, even when inflation remains above the 2% target, which the newspaper reported this week financial times, a massive sell-off of US bonds and a depreciation of the dollar. An interference which, according to Vontobel experts, would lead, in the worst case, to a collapse of investor confidence in American assets.
“Kevin Hassett is the favorite and, if confirmed, it would reinforce expectations for a more aggressive approach by the Trump administration to make fundamental changes at the Fed and increase pressure on the Federal Open Market Committee (FOMC) to cut rates,” comment the MUFG analysts. Strategists at Japan’s largest commercial bank say its landing at the Fed could reinforce dollar depreciation in 2026 and warn of tailwinds for a more aggressive rate cut: although they forecast three cuts next year, they stress that weak employment and a puncture in stock markets could accelerate the cuts. “The performance of the US stock market poses an additional risk for 2026. The S&P 500 has gained 80% in the almost three years since the end of 2022, and a deeper correction becomes a growing risk. It would also open the possibility that the Fed cuts more than expected,” they point out.
Looking ahead to next year, the Japanese bank’s experts add that “if inflation were to increase in the first quarter, and if the Fed tapers as we expect in December, this could be the last reduction of the current FOMC under Chairman Powell. At this point, the next Fed chairmanship and a possible change in the composition of the FOMC could lead to the return of “jumbo” (of 50 basis points) cuts during the summer.”
What is less clear is how much room Hassett, or any of the other likely candidates to succeed Powell, will have to impose their judgment on the Fed’s board of governors. David Seif, chief developed markets economist at Nomura, believes that “Hassett or any other new Fed chair will face strong resistance from the FOMC in trying to cut rates to the level indicated by President Trump. Therefore, we believe that more important than Trump’s election as Fed chairman is whether “Trump succeeds in replacing other members of the Board of Governors.”
Everything will depend, analysts emphasize, on any changes that will be made in the months to come. At the start of the year, the American justice system will rule on the president’s request to dismiss Fed Governor Lisa Cook. Powell, in turn, could resign as governor, which he retains until 2028, once his presidential term expires in May.
Other analysts point out that the appointment of the Fed president is always political. The U.S. Senate must approve the nomination and, although it is controlled by Republicans, no member of the legislature will want a nominee who is not qualified.
The political framework must be taken into account. Powell ends his term in May and the race for the midterm elections begins immediately, where all 435 members of the House of Representatives and a third of the Senate will be renewed, and the Republicans could lose their majority. From there, Trump would be considered a lame duck, as presidents facing the final months of their term are called. And then Hassett’s allegiance could change.
Gregory Peters, co-chief investment officer at PGIM Fixed Income, also points out that monetary policy decisions are made by the Federal Reserve Committee. “Does he have the credibility within the committee to push for consensus? I don’t think he has that credibility. I think that’s what the bond market is saying,” he assured Bloomberg last week. Since Hassett’s name began to be heard more loudly to succeed Powell, the yield on the ten-year US bond has increased from 4% to 4.1%, still far from the 5% it had reached in 2023.
Independence
Beyond a more or less aggressive position on rates, the renewal of the Fed president, like that of other positions, poses substantial challenges to the independence of the central bank. The obstacles that the White House could impose on the appointment of new positions do not help either: Treasury Secretary Scott Bessent has abandoned the possible establishment of new requirements for the appointment of presidents of regional banks of the Fed, such as the need for them to reside in the area three years before their appointment, in order to “break New York’s control” over monetary policy. Hassett accepted the change proposed by the Treasury Secretary.
Vontobel strategists propose four possible scenarios for the institution and its impact on the market: withdrawal of political interference and return to a path marked by the mandate of the Fed in accordance with the premises of TACO — in English Trump always chickens out— which advocates because the president always ends up backtracking on his most radical aspirations; a slight erosion of their independence; White House intervention in monetary policy “intermittently evident” and total interference that would involve a change in the Fed’s legal framework. Experts from the Swiss bank attribute a probability of between 45% and 65% to the second option, according to which, according to them, the Fed’s roadmap, known as forward-looking orientation— “is no longer as strictly data-driven” and financing costs are increasing moderately for businesses.
And although they only give a 5% probability to the most extreme scenario, they point out that in this scenario “central bank independence is effectively overridden or seriously compromised by political forces”, which could lead to an escalation in US bond yields, raising corporate financing differentials to levels “unsustainable for most businesses” and causing a crisis in the dollar exchange rate.
If nothing changes, Trump won’t announce Powell’s successor until 2026. It will be May when he can finally get rid of him as head of the Fed after fierce harassment over the past year and a half, even forcing him to put on a hard hat to show him the progress of work at the bank’s headquarters in Washington.
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