Bond investors, who have been betting for months that Jerome Powell's successor would begin cutting rates, are bracing for a "stress test," Bloomberg reports.
Donald Trump is expected to announce his choice in the coming days.
Over the past year, short-term US bond yields have fallen faster than long-term ones. Traders have been buying short-term bonds, expecting any Trump candidate to cut rates. At the same time, long-term bonds have been sold out of fear that political pressure on the Fed will fuel inflation.
The situation is complicated by the constantly shifting odds of the candidates, and Jerome Powell is resisting pressure from the Justice Department and has support in the Senate. Here's how the market is pricing the main front-runners:
1. Kevin Warsh (44% chance of being appointed Fed Chair, according to Polymarket)
Former Fed Governor (2006-2011), considered a hawk.
Currently supports rate cuts, believing that AI will boost productivity. He also advocates aggressively reducing the Fed's balance sheet.
The appointment could push yields higher. The combination of rate cuts and a sell-off of assets on the Fed's balance sheet will likely lead to a lag in long-term bonds.
2. Rick Rieder (32% chance)
A senior BlackRock executive overseeing the fixed income market ($2.4 trillion). A dark horse in the race.
Believes two rate cuts this year are appropriate. Values the Fed's independence, but proposes an "innovative" approach to balance sheet management. The initial reaction could be dovish (a weaker dollar, a steeper curve). He is considered a market-oriented professional.
3. Christopher Waller (13% probability)
Current member of the Federal Reserve Board of Governors.
An orthodox central banker. He considers current rates 50-100 basis points above neutrality.
The safest and most predictable choice. Likely to lead to a slight decline in long-term yields.
4. Kevin Hassett (5% probability)
An economist most loyal to Trump.
A leading advocate of low rates.
The market sees him as a threat to the Fed's independence. His appointment will cause short-term rates to fall and long-term rates to rise sharply due to inflation expectations. However, Trump has made it clear that he would prefer to keep Hassett in the White House.