① Analysts at hedge fund Man Group said that if the bond market begins to question the independence of the next Federal Reserve chairman, the Fed may have to resort to quantitative easing (QE) to lower long-term borrowing costs; ② As one of Trump's confidants, White House National Economic Council Director Kevin Hassett is currently considered the most likely successor to Powell.
Analysts at hedge fund Man Group said that if the bond market begins to question the independence of the next Federal Reserve chairman, the Fed may have to resort to quantitative easing (QE) to lower long-term borrowing costs.
Kristina Hooper, chief market strategist at Man Group, wrote on LinkedIn that investors should recall what happened in the UK in 2022: when traders sold off UK government bonds due to a lack of confidence in then-Prime Minister Liz Truss's economic policies, triggering market turmoil.
She stated that since then, the UK's borrowing costs have been higher than those of many G7 economies, serving as a reminder that "the credibility of government officials is extremely important."
“If the next Fed chair is perceived as lacking independence and trying to push long-term interest rates down, I believe that person will have to resort to quantitative easing to achieve that goal as much as possible,” Hooper said.
The yield on the 10-year U.S. Treasury note has risen more than 20 basis points from its October low, a phenomenon that is quite unusual given the possibility that the Federal Reserve may cut interest rates by another 25 basis points this week.
US President Trump previously stated that he has essentially finalized his choice to succeed current Federal Reserve Chairman Jerome Powell. Powell's term as chairman will end next May.
As one of Trump's close confidants, White House National Economic Council Director Kevin Hassett is currently considered the most likely successor to Powell.
Markets widely believe that if Hassett becomes Federal Reserve Chair, she will support Trump's preferred low-interest-rate policy. Hassett stated on Monday that it would be irresponsible for the Fed to announce its interest rate path plan for the next six months.
Hooper stated that stock investors are typically driven by “simple motives” such as loose monetary policy, while bond investors are more concerned with fiscal sustainability and the independence of the Federal Reserve.
“Lowering the federal funds rate does not guarantee that long-term interest rates will also fall; in fact, it may have the opposite effect,” she said.
Gregory Peters, co-chief investment officer of PGIM's fixed income division, pointed out last week that U.S. Treasury yields have been rising since the media first reported that Hassett was the top candidate to succeed Powell.
Peters, who also serves on the U.S. Treasury’s Borrowing Advisory Committee, believes that Hassett’s increasing likelihood of securing the position exacerbates concerns about the Federal Reserve’s independence, which remains a core issue for investors.
(Article source: CLS)
