The Looming Change at the Federal Reserve
The Federal Reserve is on the cusp of a potential leadership change, and President Donald Trump has indicated that a decision on the next chair is imminent. While the President remains tight-lipped, speculation is rife, and prediction markets are increasingly pointing to National Economic Council Director Kevin Hassett as the leading candidate to succeed current Chair Jerome Powell, whose term expires in May.
Trump, when questioned about the selection process, told reporters that he knows who he will pick but declined to reveal the name. This has only fueled the ongoing speculation. Hassett himself has been publicly coy about his chances, adding to the intrigue surrounding the decision.
Hassett the Frontrunner?
Kevin Hassett's name has gained considerable traction, particularly after a Bloomberg News report identified him as the favorite. When asked about the possibility of his nomination, Hassett acknowledged the positive market reaction and suggested that his appointment would signal the President's commitment to policies that benefit Americans through lower interest rates on car loans and mortgages.
Hassett is among a group of candidates that includes current Governors Christopher Waller and Michelle Bowman, former Governor Kevin Warsh, and BlackRock fixed income chief Rick Rieder. Prediction markets are reflecting Hassett's perceived lead, with probabilities ranging from 63% to 79% across various platforms. The second-highest probability is "no announcement by Christmas," highlighting the uncertainty that still exists.
Challenges Await the New Chair
The next Fed chair will inherit a complex economic landscape and a central bank divided on the appropriate course of monetary policy. One faction believes that further interest rate cuts are necessary to safeguard the labor market, while another is concerned about the potential for increased inflation. The futures market currently indicates a strong expectation for a rate cut at the upcoming December 10th meeting, but recent market volatility underscores the challenges of predicting future policy.
President Trump has consistently advocated for lower interest rates, making it a key consideration in his selection process. However, the composition of the Federal Open Market Committee (FOMC) is set to shift in 2026, with a more hawkish tilt among the rotating regional presidents who have a vote. This could create further challenges for the new chair in navigating the competing pressures of economic growth and inflation control.
Calls for Reform and a Shift in Focus
Beyond interest rates, there are growing calls for a fundamental re-evaluation of the Fed's mission. Treasury Secretary Scott Bessent, who is leading the Fed chair search, has expressed a desire to simplify monetary policy and reduce the Fed's overall footprint in the economy. He specifically questioned the role of regional bank presidents, suggesting that their public commentary often creates unnecessary market volatility.
Bessent argued that the Fed has become too involved in managing the economy and financial markets since the 2008 financial crisis and that it's time for the central bank to return to a more traditional role focused on setting monetary policy. Mohamed El-Erian, chief economic advisor at Allianz, echoed these sentiments, calling for the Fed to "cool it" and adopt a more visionary approach. He believes that all the candidates on the short list are committed to reforming the institution, which he views as critical for both the U.S. and global economies.
One particular issue highlighted by Bessent is the process by which regional bank presidents are appointed and reappointed, including the fact that some presidents do not reside within the districts they represent. This raises questions about their connection to the local economies they are meant to serve.
Correction: The Federal Reserve's next policy meeting is Dec. 9-10, with a rate decision released on the second day. An earlier version of this story misstated the date.
