Hassett Emerges as Fed Chair Frontrunner, Stirring Rate Cut Bets
Former Trump economic advisor's potential nomination sends bond yields lower and boosts equities as markets price in a more dovish monetary policy.
Markets are recalibrating expectations for U.S. monetary policy after reports identified Kevin Hassett, former chairman of the Council of Economic Advisers under President Trump, as the leading candidate to be the next Chair of the Federal Reserve.
The prospect of a Hassett-led Fed has ignited speculation of a significant dovish shift, sending U.S. Treasury yields lower and fueling a rally in equities on Tuesday. The 10-year Treasury yield dipped below 4%, and the Dow Jones Industrial Average climbed 1.43% as investors began pricing in the possibility of earlier and more aggressive interest rate cuts.
Hassett, an economist known for his vocal support of accommodative monetary policy, has been a critic of the central bank's recent strategy. He has publicly stated he would "be cutting rates right now" if he were leading the institution, a stance that aligns with former President Trump's long-standing preference for lower borrowing costs to stimulate economic growth.
This sentiment is rippling through various asset classes. The U.S. dollar weakened, declining 0.3% against a basket of major currencies, a move some analysts are calling the ‘Hassett Effect’ on the dollar. Meanwhile, gold prices advanced as the combination of a weaker dollar and lower bond yields increased the appeal of the non-yielding precious metal.
Prediction markets have reacted swiftly, with contracts on platforms like Polymarket showing a sharp increase in wagers favoring Hassett's nomination. Analysts at Bank of America have noted that Hassett is a clear frontrunner, a sentiment echoed by other Wall Street firms that see his close relationship with Trump as a key factor.
The potential appointment raises significant questions about the Federal Reserve's future direction and its cherished independence. Current Chair Jerome Powell's term ends in May 2026, and a transition to a more politically aligned leader could introduce new volatility. Critics voice concerns that a Fed Chair taking direct policy cues from the White House could undermine the central bank's credibility, particularly its mandate to control inflation.
For investors, the implications are broad. A more dovish Fed could provide a sustained tailwind for equities by reducing the discount rate on future earnings and lowering corporate borrowing costs. According to a research note from ING, a Hassett nomination would likely be decidedly "dollar-negative" compared to other potential candidates. However, it could also risk stoking inflationary pressures if rate cuts are perceived as premature.
While no official announcement has been made, the market's pronounced reaction underscores the high stakes involved in the selection of the world's most powerful central banker. Investors will remain focused on any signals from the Trump administration as they weigh the potential for a new era of monetary policy at the Federal Reserve.