Trump’s upcoming choice for the Fed chair puts traders under pressure

Bond Market Awaits Trump’s Fed Chair Nominee

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As President Donald Trump prepares to announce his pick to succeed Federal Reserve Chair Jerome Powell, bond investors who have been betting on a shift toward lower interest rates are bracing for a pivotal moment. The decision, expected soon, could test months of market positioning.

Over the past year, yields on short-term U.S. Treasuries have consistently outperformed their longer-term counterparts. This trend reflects expectations that any of the four leading candidates for the Fed chair role would advocate for the reduced borrowing costs Trump has long favored.

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The prevailing strategy, known as the curve steepener, is based on the belief that a lower federal funds rate will make short-term government bonds more attractive, while potentially increasing inflation expectations and putting pressure on longer-term debt.

Photographer: Michael Nagle/Bloomberg

Some analysts warn that if Trump’s nominee is seen as undermining the Fed’s independence, it could drive up market borrowing costs even as official rates fall, offsetting any economic boost from easier policy.

“Everyone is trying to interpret the signals,” said Gennadiy Goldberg, head of U.S. interest-rate strategy at TD Securities USA. “It seems that being sufficiently dovish is a key requirement for the nomination.”

There is debate over just how dovish each contender is, and the odds have shifted as investors react to new developments. For example, when Trump recently hesitated to nominate Kevin Hassett—previously considered a frontrunner who favored looser policy—it triggered a selloff in Treasuries and led markets to scale back expectations for rate cuts this year.

Photographer: Michael Nagle/Bloomberg

Market participants note that any immediate response to the announcement may be limited, since monetary policy decisions are made collectively by the Federal Open Market Committee, not just the chair. Despite concerns about political influence, none of the four candidates is seen as a significant threat to market stability on their own.

“Each candidate brings relevant experience,” said Michael Krautzberger, chief investment officer for public markets at Allianz Global Investors. “None of them are extreme choices.”

The nomination process is further complicated by Powell’s resistance to a Justice Department investigation and support from some Senate Republicans, which could constrain any successor. Powell might even remain at the Fed as a governor, limiting Trump’s ability to reshape the central bank’s leadership.

How the Bond Market Could React to Each Candidate

Here’s a look at how investors might respond to the selection of Kevin Hassett, former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, or Rick Rieder, BlackRock’s fixed-income chief.

Kevin Warsh (44% probability on Polymarket)

Warsh, considered one of the more hawkish contenders, would likely prompt higher yields if appointed. He is expected to favor a combination of reducing the Fed’s bond holdings and cutting rates—a mix that could weigh on long-term inflation-linked bonds, according to Evercore ISI economists.

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During his tenure as a Fed governor from 2006 to 2011, Warsh often advocated for higher rates and warned of inflation, a stance he maintained as recently as last year. More recently, he has supported lower borrowing costs, partly due to his belief that advances in artificial intelligence will drive productivity gains. Warsh also supports a smaller Fed balance sheet and more aggressive quantitative tightening, aligning with Treasury Secretary Scott Bessent’s views.

Evercore suggests that Warsh might offset the impact of balance sheet reduction with further rate cuts if productivity improves.

Rick Rieder (32%)

Rieder is seen as a potential dove, at least initially, since his policy views are less well known, according to Ray Attrill of National Australia Bank. His appointment could lead to a weaker dollar and a steeper yield curve in the short term.

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Rieder, a late-rising candidate partly due to his likely Senate confirmation prospects, recently stated that two rate cuts this year—bringing rates to around 3%—would be suitable for the current environment of steady growth and a soft labor market. He has emphasized the importance of Fed independence but also suggested the central bank could be more innovative with its balance sheet.

With experience managing $2.4 trillion in fixed-income assets at BlackRock, Rieder could bring a market-oriented approach that might ease concerns about the Fed’s autonomy, according to Stephen Miller, a consultant for GSFM and former BlackRock executive. However, given the uncertainty around his views, traders may prefer to wait for more clarity.

“Rieder is highly credible,” said James Athey, portfolio manager at Marlborough Investment Management, “but we haven’t heard much from him yet.”

Christopher Waller (13%)

Waller, who joined the Fed board in 2020, has a history of predicting that the Fed’s post-pandemic tightening could control inflation without causing a recession. Last year, he supported rate cuts as the labor market weakened—a stance that was later validated.

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In December, Waller noted that policy rates remained 50 to 100 basis points above neutral, echoing both Fed projections and market expectations. Ed Al-Hussainy of Columbia Threadneedle Investments described Waller as a “safe bet,” suggesting his appointment would require little market adjustment. If anything, his selection could slightly lower long-term yields and flatten the yield curve.

Kevin Hassett (5%)

Markets reacted last Friday when Trump indicated a preference for keeping Hassett in the White House, with Treasury yields rising and stocks giving up gains. Investors appear to view Hassett as most closely aligned with Trump’s push for lower rates.

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“Hassett is likely the most loyal, which could mean lower short-term rates and higher long-term rates,” said Priya Misra, portfolio manager at JPMorgan Investment Management. However, his prospects have dimmed following a Justice Department probe into Powell, which has complicated the confirmation process for a Trump loyalist. Still, Trump could change course and nominate Hassett.

If Hassett is chosen, the yield gap between two- and 30-year Treasuries could widen by about 15 basis points, according to Marlborough’s Athey. “The market sees Hassett as the least independent,” he added.

—Reporting assistance by Greg Ritchie, Michael MacKenzie, and Edward Bolingbroke.

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