Trump Signals Kevin Warsh for Fed Chair as Bessent Backs Growth Push

President Donald Trump’s recent remarks have shifted the landscape for the next Federal Reserve chair. The leader suggested he may prefer to keep Kevin Hassett in his current White House role, sparking a change in prediction market odds. Former Fed governor Kevin Warsh’s chances of becoming the next Fed chair increased significantly in response.

Warsh’s odds jumped to 61% on Kalshi and 59% on Polymarket, while Hassett’s dropped to 17% and 16%, respectively. Trump’s comments, made at a rural healthcare-focused event, emphasized his appreciation for Hassett and a reluctance to move him to the Fed.

The market response was swift. U.S. stock and bond indices experienced selloffs, with the 10-year Treasury yield pushing above 4.2% for the first time since early September. The selloff was attributed to investor concerns over a potential shift in monetary policy under a more hawkish Fed chair.

Why Did This Happen?

The decision to keep Hassett in his current position has surprised analysts. Hassett had previously been seen as the favorite for the Fed chair role, largely due to his perceived inclination toward lower interest rates. Trump’s preference for Warsh, a long-time hawk, reflects a more conservative stance on inflation management. This move aligns with broader political signals about tightening monetary policy.

Warsh’s record as a Fed governor is well-known for its hawkish stance. Analysts note that his views are unlikely to support aggressive rate cuts, despite Trump’s public pressure for lower rates. This divergence between political expectations and economic realities has led to increased market volatility.

How Did Markets React?

The immediate aftermath of Trump’s comments saw a sharp decline in equity markets. The S&P 500 pared gains, and the Nasdaq 100 showed minimal movement. However, the Russell 2000 outperformed, continuing its streak of outpacing the S&P 500 for 11 consecutive sessions.

Bond markets were even more volatile. The 10-year Treasury yield reached a four-month high as traders anticipated a more hawkish Fed under Warsh. The selloff in longer-duration assets pushed investors toward safer short-term holdings, such as Treasury bills.

The yield curve steepened, reflecting growing uncertainty in the market. The spread between the 10-year and 30-year Treasury notes widened as investors worried about long-term inflation and fiscal policy risks.

What Are Analysts Watching Next?

Analysts are closely monitoring how the Treasury Department will respond to these market dynamics. Secretary Scott Bessent has been pursuing a strategy of activist Treasury issuance, favoring T-bills over long-term notes and bonds to fund the government’s borrowing needs.

Bessent’s approach has kept 10-year Treasury yields artificially low, according to some economic models. By shifting issuance toward short-term instruments, the Treasury has effectively taken on a role traditionally managed by the Fed. This strategy, while controversial, reflects Bessent’s belief that longer rates are currently overpriced.

Market participants are also watching how central bank independence will be maintained. Trump’s public attacks on Fed Chair Jerome Powell and calls for a more aggressive rate-cutting policy have raised concerns about potential political interference in monetary decisions.

Central banks worldwide have voiced support for Powell, emphasizing the importance of independent monetary policy. The U.S. Federal Reserve's independence from political pressure is seen as a key factor in maintaining economic stability.

The coming months will test how these dynamics evolve. The Fed’s January meeting, where a rate pause is expected, will be closely watched for signs of a potential shift in policy. Investors are also eyeing the upcoming Treasury auctions and the Fed’s response to the yield curve’s steepening.

In the broader picture, the interplay between political leadership, monetary policy, and fiscal strategy will continue to shape market conditions. As the Trump administration seeks to reshape the Fed’s direction, the financial community will assess the long-term implications for both domestic and global markets.