🥛 Will the new Fed Chair break markets? 📈

GM. This is Milk Road Macro, the newsletter that watches the bond market so you don’t have to get a finance PhD to know when the economy’s about to break.

Here’s what we got for you today:

✍️ Concerns are brewing over Hassett as Fed Chair
🎙️ The Milk Road Macro Show: Capitalism Is Dead: EB Tucker Explains the New “Managed Economy” Taking Over Markets
🍪 Two major Wall Street firms say the AI boom isn’t a mania

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CONCERNS ARE BREWING OVER HASSETT AS FED CHAIR

Kevin Hassett appears to be Donald Trump’s man to become the next chair of the Federal Reserve in May 2026.

Hassett is a major “Trump ally” and has been for years.

Many people believe Hassett as Fed Chair could be a “Trump puppet”.

Because Trump wants interest rates lowered quickly, Hassett may attempt to get this done at all costs.

But this is causing big concerns among some big players in the bond market - because of a pesky thing called inflation.

Fears over a bond market “freak-out” are rising.

So, what’s going on?

Let’s take a look at what’s happening and what this means…

So, what’s the latest?

Odds on Hassett being nominated for Fed Chair have been soaring on prediction markets.

Source: Polymarket

However, there’s been a flurry of news stories in recent days, and they all have the same message: there are big worries about the potential of Hassett as Fed Chair.

According to Fox News:

“There is a last ditch attempt by Wall Street and corporate America insiders to caution Donald Trump about the selection of Kevin Hassett as Fed Chair.”
“Their argument goes something like this: Hassett has a lack of credibility inside the Fed with staff, and in the markets.”
“They’re saying his appointment sets the stage for higher long-term interest rates because the Fed will be a disorganized mess with a leader that lacks credibility.”
“If Hassett manages to cut short-term rates with a divided vote because of sticky inflationary pressures, it will be received as political and inflationary.”

Source: Bloomberg

According to the Financial Times:

“Bond investors have warned the U.S. Treasury about Kevin Hassett’s potential appointment amid fears that he would cut rates aggressively to please Donald Trump.”
“The Treasury last month solicited feedback on Hassett from executives at Wall Street banks, asset management firms, and other participants in the debt market.”
“Several people told the Treasury they were worried that Hassett might agitate for indiscriminate rate cuts even if inflation continued to run above the Fed’s 2% inflation target.”

So, what does this mean - in simple terms?

Fed rate cuts are meant to stimulate the economy by bringing down borrowing costs for businesses and consumers.

But rate cuts only work to full effect if the bond market “agrees” with rate cuts, and Treasury yields move downwards across the board (both short-term yields and long-term yields).

But this is not guaranteed - while the Fed largely controls short-term yields through its actions, longer-term yields are largely determined by the market.

If the market perceives that the Fed is cutting rates too aggressively, and believes this will ignite inflationary pressures - bond investors might demand a higher yield for holding longer-term Treasuries, in order to protect themselves against inflation risk.

Think of it like this:

The 10-year Treasury yield is currently roughly 4%.
CPI (inflation) is currently 3%.
So bond investors are currently making a “real yield” of roughly 1% per year (the nominal yield minus inflation).
If bond investors (who are generally pretty smart folks) believe Fed rate cuts will lead to a rebound higher in inflation, this will eat further into their “real yield”.
So they may only be interested in buying 10-year Treasuries at a higher yield, in order to preserve a meaningful “real yield”.
And this could lead to 10-year Treasury yields repricing higher in order to find demand.

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CONCERNS ARE BREWING OVER HASSETT AS FED CHAIR (P2)

Why would rising long-term Treasury yields be bad?

The 10-year Treasury yield is the benchmark yield.

Mortgage rates and consumer rates are priced off the 10-year yield, not short-term yields.

If the Fed cuts rates and the 10-year yield spikes on inflation concerns, mortgage rates and consumer rates will also rise, which could then lead to an economic slowdown.

This is the exact opposite outcome to what policymakers would hope for.

Strongly rising long-term yields can also be destabilizing to risk asset markets like stocks and bitcoin.

We’ve seen in recent years that the 10-year Treasury yield rising above roughly 4.5% has coincided with weakness across risk asset markets.

Source: TradingView

Let’s look to the market for clues

Having said all of the above, the market doesn’t actually believe inflation is a huge issue currently.

Expectations of future inflation have been falling quite sharply recently.

This can be seen through 10-year inflation swaps (market-derived expectations of inflation over the next ten years).

They’ve been dropping in recent months.

Source: Augur Infinity

So, there are no immediate concerns about rising inflation.

But this could change if Kevin Hassett is named as Fed Chair and it becomes clearer that he wants to cut rates quickly.

Also, the market isn’t expecting “rapid turbo rate cuts” in 2026.

Rate cut expectations are currently sitting at roughly four 25bps cuts between now and the end of next year.

So, if we assume a 25bps rate cut at the December Fed meeting next week (likely), that’s only three 25bps cuts expected in 2026.

The Fed Chair does not have absolute power over interest rate decisions - they are decided by a vote involving the 12 members of the FOMC board.

So, it’s not the case that Hassett could just walk in and immediately start slashing rates quickly just because he wants to - he needs consensus on the board.

Gregory Peters, co-chief investment officer at PGIM Fixed Income, said:

“Does he [Hassett] have the credibility within the committee to drive consensus? We don’t know that answer. I don’t think he has that credibility. I think that’s what the bond market is telling you.”

Wrapping up

Some concerns are emerging about the potential of Kevin Hassett becoming Fed Chair.

Big players in the bond market fear that Hassett may attempt to push through "unwarranted" rate cuts.

And they think this could cause a “freak-out” in the Treasury market due to inflation fears.

If this happens - it could spell bad news for the economy and also potentially bad news for risk assets like stocks and bitcoin.

While the market isn’t currently particularly worried about inflation risk - things could change with Hassett as Fed boss.

Keep your eyes peeled on the Treasury market…

That’s it for this edition - catch you in the next one.

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