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Author: Xiao Yanyan, Jin Shi Data
Bond investors have told the U.S. Treasury Department they are concerned about the possible nomination of Kevin Hassett as Fed chairman, fearing he could aggressively cut interest rates to suit Trump.
Treasury officials sought feedback on Hassett and other candidates during one-on-one conversations with executives from major Wall Street banks, asset management giants and other key players in the U.S. bond market, according to multiple people familiar with the matter.
The discussions took place in November, before Treasury Secretary Bessant launched a second round of interviews to find Powell’s successor, these people said.The Treasury Department said it “regularly communicates with a variety of market participants and investors on important developments and dynamics in the U.S. Treasury market and broader financial markets.”It added: “In discussions with key stakeholders, the distribution of market expectations for possible asset-wide outcomes for the five potential Fed chair candidates has been extremely narrow.”
As the White House’s top economic official, Hassett has emerged as a leading candidate for the job in recent weeks after Trump and Bessent narrowed the list of potential candidates from an initial list of 11.
Trump said on Tuesday he planned to announce his nominee to chair the Federal Reserve “early” next year and suggested Hassett was 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 until the president himself makes an announcement is idle speculation.” The Treasury Department added that it was “confident (Trump’s) selection will serve the American people well”.
Market participants’ doubts about Hassett reflect broader anxiety on Wall Street about a leadership change at the Fed as Trump prepares to name a new central bank governor.Some veteran bond market participants prefer other candidates, such as BlackRock’s Rick Rieder and Fed Governor Christopher Waller, who are seen as more independent than Hassett and more distant from Trump.
Several market participants in communication with the Treasury Department said they were concerned about Hassett’s close relationship with Trump.Trump has insisted on deep interest rate cuts and called Powell a “stubborn mule” after the central bank has only modestly lowered borrowing costs this year.
According to three people familiar with the matter,Bankers and investors worry that Hassett could advocate for indiscriminate rate cuts even if inflation persists above the Fed’s 2% target.
“No one wants to experience a ‘Truss shock,’” one market participant said, referring to the shock to British bond markets in 2022 caused by then-Prime Minister Liz Truss’s unfunded tax cut plan.
With U.S. inflation likely to rise next year,The prospect of a dovish Fed chair is seen as particularly worrisome by major bond managers.The Fed’s favored inflation measure registered 2.7% in August.
One market participant stated,Loose monetary policy combined with higher inflation could trigger a sell-off in long-dated Treasuries.
The insider added,Some market participants are also unconvinced that Hassett can win over the divided Fed Board of Governors and forge consensus on an interest rate decision.
Among those involved in those conversations were members of the Wall Street bond giants that make up the Treasury Borrowing Advisory Committee (TBAC), which advises Bessant on market and issuance issues, according to two people familiar with the matter.
When Hassett, an economist who has spent his career studying tax policy, met with TBAC earlier this year, he spent little time talking about markets and instead promoted White House priorities, including discussing Mexican drug cartels, these people said.
A Washington insider, Hassett served as a senior economic adviser for the presidential campaigns of John McCain, George W Bush and Mitt Romney before joining the White House during Trump’s first term as chairman of the Council of Economic Advisers.He also worked at the American Enterprise Institute, a conservative think tank, and at the Federal Reserve, where Fed employees who worked with him remember him as ambitious.
Robert Tetlow, a senior policy adviser who recently left the Fed, said Hassett struck him as “intelligent, eloquent and confident.”However, there are widespread concerns that his close relationship with Trump will threaten the Fed’s independence.Trump has spent the past year attacking the U.S. central bank.
Claudia Sahm, a former Fed economist and now chief economist at New Century Consultants, said: “Kevin Hassett is fully capable of doing the job of Fed chairman. The question is which one will take office? The Kevin Hassett who was actively involved in the Trump administration? Or the Kevin Hassett as an independent economist?”
John Stopford, head of multiple income at asset manager Ninety One, added: “I think the market sees him as a Trump puppet and that will erode the Fed’s credibility to a certain extent.”
