FILE PHOTO: U.S. President Donald Trump and Federal Reserve Chair Jerome Powell speak during a tour of the Federal Reserve Board building, which is currently undergoing renovations, in Washington, D.C., U.S., July 24, 2025. REUTERS/Kent Nishimura/File Photo/File Photo
Bond investors who have spent months wagering that Federal Reserve Chair Jerome Powell’s successor will push for interest-rate cuts face a stress test of those bets with President Donald Trump’s choice expected any day.
Yields on short-term US notes have consistently outperformed those on longer-maturity debt over the past year on the assumption that all four finalists for the job would seek the lower borrowing costs Trump has repeatedly sought.
The so-called curve steepener reflects the view that a lower US benchmark makes short-term Treasuries more appealing, but hurts longer-term debt by fanning inflation expectations.
Price pressures may also rise if investors are concerned Trump’s pick will erode Fed independence, with markets potentially offsetting the economic boost from cheaper official rates by pushing up their own borrowing costs.
"We all read tea leaves,” said Gennadiy Goldberg, head of US interest-rate strategy at TD Securities USA. "It appears the qualification for the nomination is that the candidate has to be sufficiently dovish. That’s a major part of it.”
Opinions differ over how dovish each candidate is, and as the odds have shifted as investors have scrambled to catch up. That played out last Friday when Trump signaled reluctance to tap Kevin Hassett, once the frontrunner and seen as favoring easier policy, sparking a Treasury selloff and leaving markets pricing fewer than two Fed cuts this year.
Investors caution that any immediate reaction to an announcement may be muted, given that monetary policy is set by a dozen central bankers on the Federal Open Market Committee rather than the chair alone. And even as concern has mounted around the Fed’s ability to remain independent of politics, none of the four candidates is perceived on their own as posing a major risk to the market.
"They all have relevant backgrounds,” said Michael Krautzberger, chief investment officer for public markets at Allianz Global Investors. "They are not in shock territory.”
The nomination process may be complicated by Powell’s pushback against a Justice Department probe and public support from some Senate Republicans, underscoring the constraints facing any successor. Powell could even remain at the Fed as a governor, limiting Trump’s ability to reshape the FOMC.
Against this backdrop, here’s a rundown of how the bond market may react to who wins the race among Hassett, former Fed Governor Kevin Warsh, Fed Governor Christopher Waller and Rick Rieder, who oversees fixed income at BlackRock Inc.
Kevin Warsh (44% likelihood of being nominated on prediction-market platform Polymarket as of 4 p.m. Thursday in New York)
The appointment of Warsh - seen by many as one of the more hawkish candidates - would likely push yields higher. He is also likely to pursue a policy combination of selling the Fed’s bond portfolio while cutting rates, a mix that would also lead to long-term inflation-linked bonds to underperform, Evercore ISI economists, including Krishna Guha wrote in a recent note.
As a Fed governor from 2006 to 2011, Warsh sometimes called for higher rates even as other officials focused on the economic fallout of the financial crisis, often warning of impending inflation, a concern he reiterated as recently as last year.
He subsequently became a supporter of lower borrowing costs, however, in part because he reckons advances in AI will spur faster productivity. He has also strongly favored materially smaller balance sheets and more aggressive quantitative tightening. His commentary suggests a willingness to move toward a less dominant central bank footprint in markets, a view shared by Treasury Secretary Scott Bessent.
To offset the tightening effect of balance-sheet reduction, Warsh could favor additional rate cuts on expectations of productivity gains, Evercore wrote.
Rick Rieder (32%)
Investors may be inclined to put Rieder in the dovish camp, at least initially, in part because his approach to Fed policy is less well known, according to Ray Attrill, a strategist at National Australia Bank. The knee-jerk reaction may be a softer dollar and a steeper US yield curve, he said.
A dark-horse candidate who gained late momentum in part because the Senate may be more willing to confirm him, Rieder said this month that two rate cuts this year to about 3% are "appropriate” for the current environment of "solid” growth but a soft labor market.
Rieder has called the Fed’s independence "critical,” but has also echoed Bessent in saying the central bank could be more "innovative” in how it uses its balance sheet.
As a veteran of BlackRock, helping oversee $2.4 trillion in fixed-income assets, Rieder would bring a market-centric perspective to the job that may help to ameliorate concerns over Fed independence, said Stephen Miller, a consultant for GSFM and former head of Australian fixed-income markets for BlackRock.
With Rieder representing something of an unknown quantity, though, traders may opt to take a wait-and-see approach.
"Rieder is on the top of the list of credibility,” said James Athey, a portfolio manager at Marlborough Investment Management, "but we haven’t heard from him much.”
Christopher Waller (13%)
Waller, who joined the Fed board in 2020, has a track record on monetary policy that includes predicting the Fed’s post-pandemic tightening cycle could curb inflation without triggering a recession. Last year, he dissented in favor of rate cuts as labor-market conditions softened, a view that was later vindicated.
Waller said in December that policy remains 50 to 100 basis points above neutral - the level that neither restrains growth nor fuels inflation - broadly in line with Fed officials’ projections and market pricing.
Seen by the market as "a safe bet,” Waller’s appointment to the post would leave little to reprice, said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments.
If anything, as an orthodox choice, the nomination of Waller could lead to slightly lower long-term yields and a flatter yield curve, he said.
Kevin Hassett (5%)
Treasury yields rose and stocks erased gains last Friday after Trump signaled he would prefer to keep Hassett in the White House. The market reaction suggests investors view Hassett as the most aligned with Trump and his desire for lower borrowing costs.
"Hassett might be considered the most loyal, so probably lower front-end rates and higher long-end rates,” said Priya Misra, a portfolio manager at JPMorgan Investment Management.
His chances of securing the job, though, diminished after the Justice Department’s probe into Powell triggered a backlash in Washington, complicating the confirmation prospects for a Trump loyalist. Trump could still reverse course and nominate the economist.
If that happens, the yield spread between two- and 30-year Treasuries could steepen by about 15 basis points, according to Marlborough’s Athey.
"Hassett is viewed by the market as the least independent,” he said. - Bloomberg
