Markets Weigh Waller's Fed Bid, Await GDP on Policy Path

The U.S. financial markets are bracing for a pivotal week as attention turns to the Federal Reserve's leadership transition and the release of the first official third-quarter GDP data in over a month. Federal Reserve Governor Christopher Waller, a leading contender to succeed Jerome Powell as Fed chair, is set to meet with President Donald Trump, heightening expectations around the independence of the central bank. Meanwhile, the upcoming GDP report will offer the first concrete look at the economy post-shutdown, shaping the Fed's policy trajectory.

Wall Street is closely monitoring Waller's potential nomination, as it could signal a shift in the Fed's approach to rate cuts and economic stewardship. Prediction markets have boosted Waller's chances to about 25%, reflecting investor speculation about how his dovish stance might influence the central bank's future. At the same time, the Fed's current accommodative policy has already been tested, with the benchmark interest rate now in the 3.50%–3.75% range.

The third-quarter GDP data, delayed by a historic 43-day government shutdown, will be a critical barometer of the economy's resilience. Analysts are looking for confirmation that the economy maintained growth of 3.1% to 3.5%, aligning with nowcasting models. A stronger-than-expected report could reinforce the Fed's narrative of a "soft landing," while a weaker print might prompt concerns about a hard landing ahead.

Leadership Uncertainty and Central Bank Independence

Christopher Waller emphasized the importance of central bank independence during a recent interview, signaling that he would make it a central point of discussion with President Trump according to Barron's reporting. Waller stressed that while the Fed must remain free from political interference, it also needs to maintain accountability to the public through transparency and communication. His remarks underscore the delicate balance between maintaining independence and fostering cooperation during economic crises.

Waller's stance has put him in direct contrast with Trump's previous attempts to assert control over the Fed, including efforts to remove Lisa Cook and appoint a close ally to the board. The current race for the Fed chair has become a focal point for market sentiment, with Waller, Kevin Hassett, and Kevin Warsh all vying for the role. Hassett, who has been a top Trump adviser, has publicly stated that the president's views on interest rates should carry no weight in the Fed's decisions.

Market Reactions and GDP Outlook

Investors are also preparing for the release of the third-quarter GDP data, which will provide the first official read of the economy post-shutdown. The report is expected to reveal whether the 3.8% growth seen in Q2 2025 was a peak or if the economy maintained momentum despite rising interest rate pressures. The data will be closely scrutinized for signs of inflationary pressures and labor market weakness.

The shutdown caused a statistical vacuum, with the BEA unable to publish timely GDP estimates. As a result, the December 23 report will incorporate more source data than a typical advance release, potentially making it more volatile. Goldman Sachs has noted that while the report is backward-looking, it will provide a critical baseline for assessing economic momentum and the impact of the fiscal impasse.

Policy Implications and the Road to 2026

The Fed's next policy meeting in January 2026 will be shaped by the GDP data and the broader economic outlook. With the central bank still flying "partially blind" due to delayed data, the December report will be a key input for policymakers. If the GDP number exceeds expectations, it could support a "Santa Claus rally" into year-end, reinforcing the Fed's current accommodative stance. A sub-2% print, however, would raise concerns about a potential hard landing in early 2026.

The market is also watching for signs of a "K-shaped" recovery, where large-cap companies and tech firms continue to outperform amid broader economic uncertainty. Walmart and Amazon, for instance, have capitalized on consumer demand and supply chain advantages, while smaller firms struggle with liquidity constraints. The Fed's ability to navigate this divergence will be critical in maintaining economic stability.

Risks and Uncertainties

Several risks remain on the horizon, including the potential for geopolitical tensions to disrupt energy markets and the broader economy. Oil prices have been under pressure, with WTI trading near $55 per barrel, reflecting weak demand and high global production. Energy stocks, however, have outperformed the underlying commodity, suggesting that investors remain cautiously optimistic about the sector's long-term prospects.

The Fed's next steps will also be influenced by the outcome of the leadership race. If Trump selects a chair seen as more aligned with his economic priorities, it could undermine the Fed's credibility and lead to higher borrowing costs. Conversely, a chair who prioritizes independence and transparency could bolster market confidence and reinforce the Fed's role as a stabilizing force in the economy.