Market warning: Nominating Hassett as Fed Chair may trigger a rate cut storm

Author: Xiao Yanyan, JIN10 Data

Bond investors have informed the US Treasury that they are concerned about the possible nomination of Kevin Hassett as Federal Reserve Chair, fearing he would aggressively cut rates to appease Trump.

According to multiple sources familiar with the matter, Treasury officials sought feedback on Hassett and other candidates during one-on-one conversations with senior executives from major Wall Street banks, asset management giants, and other key institutions in the US bond market.

These sources said the discussions took place in November, before Treasury Secretary Bessent launched the second round of interviews to find a successor to Powell. The Treasury stated that it “regularly communicates with a variety of market participants and investors regarding important developments and trends in the US Treasury market and the broader financial markets.” It added: “In discussions with key stakeholders, the range of expected outcomes for various assets resulting from the five potential Federal Reserve Chair candidates is extremely narrow.”

As the White House’s chief economic official, Hassett has emerged as a leading candidate for the position in recent weeks, after Trump and Bessent narrowed the list of potential candidates from an initial 11.

On Tuesday, Trump said he plans to announce his nominee for Fed Chair “early next year” and hinted that Hassett is a “potential” contender. The dollar briefly fell after he mentioned Hassett.

The White House told the Financial Times: “The President will continue to nominate the most qualified individuals to serve in the federal government, and any discussion of potential nominations before the President himself makes an announcement is meaningless speculation.” The Treasury added that it “believes (Trump’s) choice will serve the American people well.”

Market participants’ concerns about Hassett reflect Wall Street’s broader anxiety over a change in Fed leadership, as Trump prepares to nominate a new central bank chief. Some senior bond market participants prefer other candidates, such as BlackRock’s Rick Rieder and Fed Governor Christopher Waller, who are seen as more independent and less closely tied to Trump than Hassett.

Several market participants who spoke with the Treasury said they were worried about Hassett’s close relationship with Trump. Trump has consistently insisted on steep rate cuts and has called Powell a “stubborn mule” for the Fed’s moderate easing of borrowing costs this year.

According to three sources familiar with the talks, bankers and investors fear that Hassett might advocate indiscriminate rate cuts even if inflation remains above the Fed’s 2% target.

“No one wants to go through a ‘Truss shock’,” said one market participant, referring to the turmoil in the UK bond market triggered by then-Prime Minister Liz Truss’s unfunded tax cut plan in 2022.

With US inflation likely to rise next year, the prospect of a dovish Fed chair is seen as particularly worrying by major bond management firms. The Fed’s preferred inflation gauge registered 2.7% in August.

One market participant noted that an easy monetary policy combined with higher inflation could trigger a sell-off in long-term Treasuries.

Sources added that some market participants also doubt Hassett’s ability to win support from a divided Fed Board and to build consensus on interest rate decisions.

According to two people familiar with the matter, those involved in these conversations included members of the Treasury Borrowing Advisory Committee (TBAC), composed of Wall Street bond giants who advise Bessent on market and issuance issues.

These individuals said that when Hassett, whose career as an economist has focused on tax policy research, met with the TBAC earlier this year, he spent little time discussing markets and instead promoted White House priorities, including discussions about Mexican drug cartels.

As a Washington insider, Hassett served as a senior economic adviser to the presidential campaigns of John McCain, George W. Bush, and Mitt Romney, before joining the White House as Chair of the Council of Economic Advisers during Trump’s first term. He has also worked at the conservative think tank American Enterprise Institute and at the Federal Reserve, where former colleagues recall his ambition.

Robert Tetlow, a senior policy adviser who recently left the Federal Reserve, said Hassett struck him as “smart, articulate, and confident.” However, there is widespread concern that his close relationship with Trump would threaten the Fed’s independence. Trump has repeatedly attacked the US central bank over the past year.

Former Fed economist and current chief economist at New Century Advisors, Claudia Sahm, said: “Kevin Hassett is fully capable of being Fed Chair. The question is, which version of him will show up? The Kevin Hassett who was actively engaged in the Trump administration, or the independent economist Kevin Hassett?”

John Stopford, Head of Multi-Asset Income at asset manager Ninety One, added: “I think the market sees him as a Trump puppet, and that will undermine the Fed’s credibility to some extent.”