Hassett at the Fed helm could pressure the dollar, investors say

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By Saqib Iqbal Ahmed

NEW YORK (Reuters) -Beneath the U.S. bond markets’ composure around the prospect of White House economic adviser Kevin Hassett becoming the next Federal Reserve chair lies a niggling worry that his bias for interest rate cuts will undermine the dollar.

Bets on Hassett replacing Jerome Powell when his Fed chairmanship ends in May climbed this week after a Bloomberg news report, although the White House said any discussion on the new chair remained speculative until a final decision.

Short-term yields, which are closely tied to Fed rate expectations, initially dipped as Hassett’s lead on betting sites rose, but they soon rebounded.

The dollar and Fed funds futures barely reacted, with traders pricing in an 83% probability of a quarter-point rate cut in December, according to CME’s FedWatch tool.

Hassett, a former Fed senior economist, is deemed close to U.S. President Donald Trump’s administration. Both favor a faster reduction in interest rates.

The possibility of Hassett being nominated Fed chair “puts rate cuts back on the table and is bearish for the dollar,” said Mike Riddell, lead portfolio manager for Fidelity International’s Strategic Bond strategies.

But the market barely reacted, perhaps because he was seen as the favourite and Treasury yields had fallen quite a bit in recent weeks, Riddell said.

The field of candidates has narrowed to a handful of finalists who include former Fed Governor Kevin Warsh, Fed Governor Christopher Waller, Fed Vice Chair for Supervision Michelle Bowman, and BlackRock executive Rick Rieder.

On betting site Polymarket, Hassett’s odds have risen 18 points to 53%, with Waller in second place at 22% and Warsh at 16%.

FED INDEPENDENCE

So far, investors are discounting any erosion of Fed independence, regardless of who takes the helm.

Even if the administration would like to reduce financing costs for a rising pile of government debt, few people think it would adopt a policy to prioritize low-cost government financing over the Fed’s mandate of controlling inflation.

“I think the market understands this, that the chairman doesn’t decide rates. The chairman guides a committee and 12 people get to vote,” said Art Hogan, chief market strategist at B. Riley Wealth.

“As much as you’d like to think that a very dovish Fed chair might move monetary policy easier over the course of his tenure, it just doesn’t work that way,” Hogan said.    

The future path of interest rates also remains heavily dependent on fresh U.S. data, with investors focused on how the economy responds to key labor reports and the Trump administration’s trade and tariff policies.

“Wall Street is going to be of two minds on Kevin Hassett, should he wind up as Fed Chair,” said Tom Graff, chief investment officer at investment manager Facet.

“He will be viewed as less independent compared to either past Fed chairs, or for that matter a candidate like Christopher Waller. This creates some risk to the dollar as well as risks to a steeper Treasury yield curve.”

Graff, however, also believes Hassett’s traditional economics background precludes this, even if he might be more aggressive about rate cuts than Powell.

POLITICIZED FED?

The Fed eased rates by a quarter of a percentage point at each of its meetings in September and October, leaving the Fed funds rate – what banks charge each other for overnight lending and the Fed’s main policy lever – at 3.75% to 4.00%.

Since then, Fed officials have pressed competing views on the economy and risks facing it, a debate set to intensify ahead of the U.S. central bank’s next policy meeting in December.

In September, Hassett backed the Fed’s ‘slow and steady’ approach to lowering rates and told CBS News’ “Face the Nation” show that Fed policy needs to be fully independent of political influence, including from Trump.

Threats to Fed independence came into focus earlier this year following Trump’s attempt to fire Governor Lisa Cook, a move that was temporarily blocked by the U.S. Supreme Court.

“The whole kind of ‘Trump is going to own the Fed’ is overdone, even with Hassett,” said Sally Greig, head of global bonds at Baillie Gifford. 

“He’d find it hard to push the whole committee to be as dovish as Trump might want. Also, he might not be as dovish as people are expecting him to be.”

(Additional reporting by Laura Matthews in New York and Vidya Ranganathan and Dhara Ranasinghe in LondonEditing by Vidya Ranganathan and Richard Chang)