Although Jerome Powell still has a few months left to serve as chairman of the Federal Reserve, markets are already considering who will likely take over as head of the central bank, and changes in the bond market indicate that they are uneasy.
In the past week, Kevin Hassett, the director of the National Economic Council, has risen to the top of the list of potential future Fed chiefs. On Polymarket, his chances of being nominated increased from roughly 30% at the end of November to 73% on Friday.
At a White House gathering on Wednesday, Donald Trump, who has long pushed Powell to cut interest rates, seemed to imply that Hassett was leading.
Hassett has been an outspoken supporter of rate reductions and has indicated that he would be in favor of drastic rate reductions.
"I suppose a prospective Fed Chair is also present. I'm not sure if we can mention that. Possibility. I can assure you that he is a well-respected individual. The president said, "Thank you, Kevin."
Investors are not overjoyed that a close Trump buddy could head the central bank, as evidenced by the muted but evident response in the markets.
Since Hassett's prospects have improved, bonds have dropped off. The 10-year US Treasury rate has increased by 11 basis points since Bloomberg revealed last Tuesday that he was the front-runner.
Although it is widely anticipated that Hassett would keep pushing for rate cuts, bond rates aren't declining as one might anticipate.
The increase in yields indicates that investors believe the Fed may eventually start raising interest rates again. In order to appease Trump, Hassett might drastically cut borrowing prices. This would lead to new inflation, which would eventually force the Fed to tighten policy once more.
"That's basically because we know that Kevin Hassett is very, very loyal to President Trump," Pepperstone senior research strategist Michael Brown explained in reference to the recent shift in bond yields. "It is almost solely on the back of Hassett, given that we've had nothing really else to trade on this week."
Additionally, Brown cited a recent slide in the US Dollar Index, which since Bloomberg released its report has fallen from 99 to 98.
Given that the dollar usually moves in unison with Treasury yields, he added, this is another indication that investors are concerned about inflation and its effects on the US economy.
According to Ryan Swift, chief bond analyst at BCA Research, the change in yields appears to have been mostly caused by rumors that Hassett will be the next Fed chair.
Swift said on Thursday, "We continue to recommend Treasury curve steepeners as a high conviction trade heading into 2026," implying that long-term bond yields will keep rising.
Bond markets were reflecting the rumors surrounding Hassett, according to Art Hogan, chief market strategist at B. Riley Wealth Management.
"I think that investors are looking at the whole picture and saying, 'well, inflation is certainly going to be reported above the Fed's target for quite some time,'" said the economist.
To be fair, not everyone believes Hassett will be able to drastically reduce rates. There are twelve voting officials on the Federal Open Market Committee, including the Fed chief, and some believe Hassett would struggle to persuade more hardline members to adopt a dovish stance.
This week, Gregory Peters, co-chief investment officer at PGIM Fixed Income, told Bloomberg TV that markets shouldn't expect quick rate reduction under Hassett's leadership. He did concede, though, that central bank independence is an issue.
However, other investors have expressed their concerns more openly. When asked for input by the US Treasury in November, investors at major Wall Street banks, asset managers, and other companies involved in the debt market expressed concerns about Trump's list of Fed Chair candidates, according to The Financial Times.
According to the FT, a number of investors expressed concern about Hassett in particular and raised the possibility that he may lower interest rates despite the fact that inflation is still significantly higher than the Fed's 2% target.
"President Trump has assembled the best and most experienced economic team in modern history," White House spokesperson Kush Desai told Business Insider.
"The President will continue to nominate the most qualified individuals to the federal government, and until an announcement is made by him, any discussion about potential nominations is pointless speculation."
