53% probability! Hasset leads the race for the Federal Reserve chairman, but is the bearish on the US dollar just a "paper tiger"?

The US bond market remains calm about White House economic advisor Kevin Hassett potentially becoming the next Federal Reserve chairman, but beneath this calmness, there is still a hint of concern: his tendency towards rate cuts may weaken the US dollar. Hassett, a former senior economist at the Federal Reserve, is seen as being close to the Trump administration - both sides advocate for faster rate cuts. Mike Riddell, chief investment officer of global strategic bond strategies at Fidelity International, stated that rumors of Hassett being nominated as Federal Reserve chairman "have put rate cuts back on the agenda, which is bearish for the dollar." However, the market's reaction has been muted, perhaps because he is already a popular candidate and bond yields have fallen significantly in recent weeks. Specifically, short-term yields closely tied to Federal Reserve rate expectations initially fell due to Hassett's leading position on betting websites, but soon rebounded. Meanwhile, the US dollar exchange rate and federal funds futures market remained stable; according to the CME Group's FedWatch tool, traders still believe there is an 83% probability of a 25 basis point rate cut in December. The list of candidates for Federal Reserve chairman has narrowed down to a few individuals, including former Federal Reserve governor Kevin Warsh, current Federal Reserve governor Christopher Waller, regulatory vice chair Michelle Bowman, and BlackRock executive Rick Rieder. On the prediction market platform Polymarket, the probability of Hassett's selection has risen by 18 percentage points to 53%, with Waller at 22% and Warsh at 16%. Following the news this week, there has been an increase in betting on Hassett taking over when Powell's term ends in May; however, the White House has stated that any discussions about a new chairman are still just speculation until a final decision is made. Federal Reserve Independence So far, regardless of who ultimately becomes the Federal Reserve chairman, the market has taken a "dismissive attitude" towards any risks that could weaken the independence of the Federal Reserve and has not paid much attention to it. Even though the US government hopes to lower the rising cost of financing national debt, few believe that the government would prioritize low-cost financing over the Fed's statutory mandate to control inflation. Art Hogan, chief market strategist at B. Riley Wealth, stated: "I think the market understands that the chairman does not decide interest rates, but rather presides over a committee of 12 voting members." "Even if you think an extremely dovish Federal Reserve chairman could lead to a looser monetary policy, the reality is different." The future path of interest rates will still depend mainly on new US data; investors are monitoring the economy's reaction to key employment reports and the Trump administration's trade and tariff policies. Tom Graff, chief investment officer at investment management company Facet, stated: "If Kevin Hassett does become the Federal Reserve chairman, Wall Street will have mixed opinions of him." Compared to past chairmen or candidate Christopher Waller, he may be seen as having weaker independence, which could pose risks to the dollar and steepen the yield curve of government bonds. However, Graff believes that Hassett's traditional economic background will prevent him from taking that step, even if he leans towards significant interest rate cuts more than Powell. Politicalizing the Federal Reserve? The Federal Reserve cut interest rates by 25 basis points at its meetings in September and October, keeping the federal funds rate (the overnight interbank lending rate and the Fed's primary policy lever) at 3.75%-4.00%. Officials have differing views on the economy and the risks it faces, and this debate will intensify before the December meeting. In September, Hassett supported a "slow and steady" rate cut path for the Federal Reserve, stating that the Fed's policies must be completely independent from politics, including not being influenced by Trump. Earlier this year, Trump attempted to dismiss Federal Reserve governor Lael Brainard, sparking concerns about the independence of the Fed; the Supreme Court temporarily blocked the move. Sally Greig, global bond manager at Baillie Gifford, stated: "Even if Hassett takes office, the idea that 'Trump will control the Fed' has been exaggerated." "It will be difficult for him to make the entire committee as dovish as Trump would like, and he may not be as dovish as the market expects."