Investors in the bond market who have been betting for months that Jerome Powell's successor will start lowering rates are preparing for a "stress test," Bloomberg reports. Donald Trump is expected to announce his choice in the coming days.
In the past year, the yields on short-term U.S. bonds have fallen faster than those on long-term bonds. Traders have been buying "short papers" in anticipation that any Trump nominee will lower rates. At the same time, "long papers" were sold out of fear that political pressure on the Fed will drive up inflation.
The situation is complicated by the fact that the chances of candidates are constantly changing, and Jerome Powell resists pressure from the Treasury and has support in the Senate. Here’s how the market assesses the main favorites:
1. Kevin Warsh (probability of appointment as head of the Fed 44% according to Polymarket)
Former Fed governor (2006–2011), considered a 'hawk'.
Currently supports rate cuts, believing that AI will boost labor productivity. At the same time, he advocates for aggressive balance sheet reduction at the Fed.
The appointment may push yields up. A combination of rate cuts and asset sell-offs from the Fed's balance sheet is likely to lead to underperformance of long-term bonds.
2. Rick Rieder (probability 32%)
Top manager at BlackRock, overseeing the fixed income market ($2.4 trillion). A 'dark horse' in the race.
Considers two rate cuts appropriate this year. Values Fed independence but proposes an 'innovative' approach to balance sheet management.
The initial reaction may be 'dovish' (weaker dollar, increased curve steepening). He is considered a market-oriented professional.
3. Christopher Waller (probability 13%)
Current member of the Fed's Board of Governors.
Orthodox central banker. Believes current rates are 50–100 bps above the neutral level.
The safest and most predictable choice. Most likely to lead to a slight decline in long-term yields.
4. Kevin Hassett (Probability 5%)
An economist most loyal to Trump.
The main proponent of low rates.
The market views him as a threat to Fed independence. His appointment would trigger a fall in short-term rates and a sharp rise in long-term rates due to inflation expectations. However, Trump has indicated that he would prefer to keep Hassett in the White House.