The prospect of a Trump-aligned Fed chair is rattling the markets

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.

Hassett’s 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’ reports speculating on whether there is a bubble in the AI sector inflating the market circulate daily on Wall Street.

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 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.

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.

A report from the Mitsubishi UFJ Financial Group (MUFG), Japan’s largest bank, states: “Kevin 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.”

MUFG analysts believe that Hassett’s 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. “U.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,” states the report.

Looking ahead to next year, the Japanese bank’s experts add that “if 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.”

It is less clear what room for maneuver Hassett — or any of the other likely candidates to succeed Powell — will have to impose his views on the Fed’s Board of Governors. David Seif, chief economist for developed markets at Nomura, believes that “Hassett 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’s choice for Fed chair is whether Trump succeeds in replacing other members of the Board of Governors.”

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’s request to remove Federal Reserve Governor Lisa Cook. Powell, in turn, could resign from his position as governor once his term as chair ends in May, a role he holds until 2028.

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.

The political context must also be considered. Powell’s 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 — the term used for presidents in the final months of their tenure. And at that stage, Hassett’s loyalty could shift.

Gregory Peters, co-head of investments at PGIM Fixed Income, also reminds that monetary policy decisions are made by the Federal Reserve committee. “Does he have the credibility within the committee to drive consensus?” Peters said in an interview with Bloomberg TV. “We don’t know that answer. I don’t think he has that credibility. I think that’s what the bond market is telling you.” Since Hassett’s 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.

Independence

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’s independence. Obstacles that the White House might set for nominating new officials don’t 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 “breaking New York’s control” over monetary policy. Hassett has expressed agreement with the change proposed by the Treasury Secretary.

Vontobel strategists outline four possible scenarios for the institution and its market impact: a withdrawal of political interference and a return to a path guided by the Fed’s mandate, in line with the TACO principle — Trump Always Chickens Out — 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’s legal framework. The Swiss bank’s experts assign a 45% to 65% probability to the second option, under which the Fed’s roadmap — known as forward guidance — “tilts away from data-driven decisions” and financing costs rise moderately for businesses.

And although Vontobel strategists only give a 5% probability to the most extreme scenario, they argue that under this outcome, “the central bank’s independence is effectively overturned or severely compromised by political forces.” This could lead to an escalation of U.S. bond yields, which would raise corporate financing spreads to an “untenable level for most companies” and cause a dollar exchange rate crisis.

If nothing changes, Trump will not announce Powell’s successor until 2026. It will be in May when he can finally remove him from the Fed’s leadership, after a year and a half of relentless pressure.

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