If bond markets begin to doubt the independence of the next chairman, the Federal Reserve might have to use quantitative easing to reduce long-term borrowing costs, according to Man Group.
According to Kristina Hooper, chief market strategist at the largest publicly traded hedge fund firm in the world, investors simply need to consider what happened in the UK in 2022 when traders sold off gilts because they didn't trust the economic plans of then-prime minister Liz Truss.
Since then, the UK's borrowing costs have surpassed those of many other Group of Seven nations, serving as a reminder that "credibility of public officials matters," according to a LinkedIn post by Hooper.
"I think that person will have to use quantitative easing to offer the best chance to achieve that goal if they are chosen as Fed chair and are focused on lowering rates at the long end," she stated.
Given that the Fed is expected to drop interest rates by another quarter point this week, Treasury 10-year yields (^TNX) have already risen more than 20 basis points from their October lows.
President Donald Trump has stated that he is nearing the announcement of his candidate to succeed Chair Jerome Powell, whose term expires in May. Kevin Hassett, the director of the White House National Economic Council, has become the front-runner.
Many people believe that Hassett supports Trump's desire for reduced rates. Earlier this month, Trump referred to Hassett as a "potential Fed chair" and declared that the competition for the position of central bank chief is "down to one." Hassett stated on Monday that outlining the Fed's goals for interest rates over the next six months would be reckless.
According to Hooper of Man Group, bond investors are more concerned with fiscal sustainability and Fed independence, but equities investors usually have "simple motivations" like lax monetary policy.
According to her, "cutting the fed funds rate does not ensure that rates on the long end move lower; in fact, it could have the opposite effect." Gregory Peters, co-chief investment officer at PGIM Fixed Income, cited the increase in Treasury yields since the initial announcement that Hassett was the front-runner to succeed Powell last week.
According to Peters, a member of the Treasury Borrowing Advisory Committee, investors continue to have serious concerns about the Fed's independence due to the growing likelihood that Hassett will be appointed.
