A mere smile from Donald Trump is enough to unsettle investors. The U.S. president admitted last week that he had narrowed the list of contenders to replace Jerome Powell as the next Federal Reserve chair down to a single candidate. Although he will delay the official appointment until after the holiday season, the Republican president flashed a slight smile when reporters asked whether he had chosen Kevin Hassett, director of the National Council of Economic Advisers and one of his top advisers.<\/p>\n
Hassett\u2019s obvious loyalty to Trump and his expected deference to the president are raising concerns among asset managers at an uncertain time. High U.S. debt levels are compounded by warnings about elevated stock market valuations, excessive spending by major tech companies on artificial intelligence, and private credit. Analysts\u2019 reports speculating on whether there is a bubble in the AI sector<\/a> inflating the market circulate daily on Wall Street.<\/p>\n The appointment of the next Federal Reserve chair comes at a time when storm clouds are gathering on the horizon. Two opposing forces make it difficult to determine whether the storm clouds are a momentary mirage or the prelude to a more violent tempest. Signs of a weakening labor market<\/a> are becoming increasingly evident, while price pressures have yet to ease. Addressing the first issue would require cutting interest rates; tackling the second issue would require raising them.<\/p>\n Meanwhile, major asset managers have warned the Treasury about Hassett. The candidate is expected to push for more aggressive rate cuts even if inflation remains above the 2% target, which, according to the Financial Times, could trigger a massive sell-off of U.S. bonds and a depreciation of the dollar. Experts from the financial management firm Vontobel believe that, in the worst-case scenario, such interference could lead to a collapse of investor confidence in U.S. assets.<\/p>\n A report<\/a> from the Mitsubishi UFJ Financial Group (MUFG), Japan\u2019s largest bank, states: \u201cKevin Hassett is the favorite and if confirmed would reinforce expectations of a more aggressive approach by the Trump administration to make fundamental change at the Fed and increase pressure on the FOMC [Federal Open Market Committee] for lower rates.\u201d<\/p>\n MUFG analysts believe that Hassett\u2019s appointment to the Fed could further weaken the dollar in 2026 and warn of tailwinds favoring a more aggressive rate cut: although they anticipate three reductions next year, they point out that a weakening labor market and a stock market correction could accelerate the cuts. \u201cU.S. equity market performance is an additional risk for 2026. The S&P 500 has advanced 80% in the near three-year period since the end of 2022 and a larger correction lower is becoming a bigger risk. That would also open up scope for the Fed to cut more than expected,\u201d states the report.<\/p>\n Looking ahead to next year, the Japanese bank\u2019s experts add that \u201cif inflation were to rise in Q1, and if the Fed cuts as we expect in December, that could be the last cut from the current FOMC led by chair Powell. At which point the next Fed chair, and potential shift in the FOMC, may result in jumbo cuts (50bp size) returning in the summer.\u201d<\/p>\n It is less clear what room for maneuver Hassett \u2014 or any of the other likely candidates to succeed Powell \u2014 will have to impose his views on the Fed\u2019s Board of Governors. David Seif, chief economist for developed markets at Nomura, believes that \u201cHassett or any new Fed chair will face strong resistance from the FOMC when attempting to lower rates to the level President Trump has indicated. Therefore, we believe that more important than Trump\u2019s choice for Fed chair is whether Trump succeeds in replacing other members of the Board of Governors.\u201d<\/p>\n Analysts point out that everything will depend on the changes implemented in the coming months. At the beginning of 2026, the U.S. courts will rule on the president\u2019s request to remove Federal Reserve Governor Lisa Cook<\/a>. Powell, in turn, could resign from his position as governor once his term as chair ends in May, a role he holds until 2028.<\/p>\n Other analysts note that the Fed chair nomination is always political. The U.S. Senate must approve the appointment, and although the Senate is controlled by Republicans, no legislator will want a candidate who is unqualified.<\/p>\n The political context must also be considered. Powell\u2019s term ends in May, which marks the beginning of the campaign for the November midterm elections, in which all 435 members of the House of Representatives and one-third of the Senate will be up for reelection, and the Republicans could lose their majority. From that point, Trump would be considered a lame-duck president \u2014 the term used for presidents in the final months of their tenure. And at that stage, Hassett\u2019s loyalty could shift.<\/p>\n Gregory Peters, co-head of investments at PGIM Fixed Income, also reminds that monetary policy decisions are made by the Federal Reserve committee. \u201cDoes he have the credibility within the committee to drive consensus?\u201d Peters said in an interview with Bloomberg TV<\/a>. \u201cWe don\u2019t know that answer. I don\u2019t think he has that credibility. I think that\u2019s what the bond market is telling you.\u201d Since Hassett\u2019s name has gained traction as a potential successor to Powell, the yield on the 10-year U.S. Treasury has risen from 4% to 4.1%, still far from the nearly 5% it touched in 2023.<\/p>\n Independence<\/p>\n Beyond a more or less aggressive stance on interest rates, the appointment of a new Fed chair, along with other positions, poses substantial challenges to the central bank\u2019s independence<\/a>. Obstacles that the White House might set for nominating new officials don\u2019t help either: Treasury Secretary Scott Bessent has hinted at the possible establishment of new requirements for the nomination of regional Fed bank presidents, such as the need for them to have resided in the district for three years prior to their nomination, aimed at \u201cbreaking New York\u2019s control\u201d over monetary policy. Hassett has expressed agreement with the change proposed by the Treasury Secretary.<\/p>\n Vontobel strategists outline four possible scenarios<\/a> for the institution and its market impact: a withdrawal of political interference and a return to a path guided by the Fed\u2019s mandate, in line with the TACO principle \u2014 Trump Always Chickens Out<\/a> \u2014 which assumes the president ultimately backs down from his most radical ambitions; a gradual erosion of independence; intermittent White House interference in monetary policy; and total interference, which would involve a change to the Fed\u2019s legal framework. The Swiss bank\u2019s experts assign a 45% to 65% probability to the second option, under which the Fed\u2019s roadmap \u2014 known as forward guidance \u2014 \u201ctilts away from data-driven decisions\u201d and financing costs rise moderately for businesses.<\/p>\n And although Vontobel strategists only give a 5% probability to the most extreme scenario, they argue that under this outcome, \u201cthe central bank\u2019s independence is effectively overturned or severely compromised by political forces.\u201d This could lead to an escalation of U.S. bond yields, which would raise corporate financing spreads to an \u201cuntenable level for most companies\u201d and cause a dollar exchange rate crisis.<\/p>\n If nothing changes, Trump will not announce Powell\u2019s successor until 2026. It will be in May when he can finally remove him from the Fed\u2019s leadership, after a year and a half of relentless pressure<\/a>.<\/p>\n