Market expectations for this week's Federal Reserve meeting are forming a clear "script." On Monday, according to Academy Securities strategist Peter Tchir, markets priced in a 95% probability of a December rate cut. However, Powell's hawkish stance may no longer carry much weight—as an outgoing Fed chair, his influence over post-New Year policy is waning. Nomura noted that if markets react "honestly" to a "hawkish cut," it could trigger a liquidity reversal: bonds and equities may weaken due to profit-taking, the dollar could strengthen, and U.S. tech and growth stocks may face valuation pressure. If the market follows a "Hassett trade," the yield curve could steepen, global recovery expectations may rise, cyclical stocks could outperform, and the dollar might weaken again. Notably, markets may be underestimating the potential dovish coordination between the Treasury, the Fed, and the White House, as well as unconventional policy tools aimed at achieving the "3-3-3 target" (3% growth, 3% short-term yields, and 10-year yields in the 3% range).
With Trump set to announce his pick for the next Fed chair, National Economic Council Director Kevin Hassett has emerged as a leading candidate. Treasury Secretary Besant not only needs to find a suitable Fed chair for Trump but also ensure the new leader swiftly implements rate cuts—or risk losing his own job. Trump has made it clear that Besant's fate is tied to the Fed's policy direction. This leadership transition and the expected policy coordination are reshaping market expectations for the 2025 monetary policy path. Investors must reassess the traditional framework of Fed independence and the potential market impact of unprecedented fiscal-monetary coordination.
**Market Consensus and Powell's "Lame Duck" Dilemma**
Tchir noted that the simplest summary of this week's Fed meeting is: markets have priced in a 95% chance of a cut, and the Fed won’t disappoint. But the key is that Powell, as an outgoing chair, will carry far less weight with any hawkish remarks. This contrasts sharply with past Fed decision days, where the chair’s press conference was the main event, often triggering major market moves. Now, investors are more focused on Powell’s successor and the policy shift they may bring. Tchir believes markets are not yet pricing in two key factors: 1) heightened coordination between the Treasury, Fed, and White House, and 2) unconventional tools like QE, Operation Twist, or even yield curve control to meet policy goals.
**Two Possible Market Reactions: "Hawkish Cut" vs. "Hassett Trade"**
Nomura senior analyst Naka Matsuzawa warned that while markets eagerly await a Fed rate cut, it could be a "hawkish cut" full of traps. Matsuzawa argues the FOMC may deliver a hawkish cut—lowering rates while raising the bar for future cuts to placate internal hawks. If markets react "honestly," liquidity could reverse: bonds and stocks may weaken, the dollar could rise, and tech/growth stocks—driven by liquidity—may face valuation pressure. But there’s another scenario: if markets ignore the Fed’s hawkish signals and rally, the driver would likely be the "Hassett trade"—a bet on a dovish new Fed chair, reflation, and weaker dollar confidence. In this case, the yield curve steepens, cyclical stocks outperform, and the dollar weakens.
**Besant’s Dual Pressure and Coordination Role**
Treasury Secretary Besant faces unprecedented pressure. Trump has explicitly tied Besant’s performance to Fed policy, even joking in a recent speech: "The only thing Besant messed up is the Fed. If you can’t fix it fast, you’re fired." This isn’t empty rhetoric. In August, Trump blasted his first-term Treasury Secretary Steven Mnuchin for recommending Powell as Fed chair, calling it a "disaster." This precedent makes Besant acutely aware that his political future hinges on the Fed pick. At a recent event, Besant downplayed the Fed chair’s power, stating: "The chair can steer discussions, but ultimately has just one vote." This hints at closer Treasury-Fed coordination ahead.
Traditionally, the Treasury Secretary and Fed chair meet weekly for dinner. But Besant has shown a willingness to break norms, earlier accusing Fed officials of "tariff derangement syndrome" and now citing economic softness to justify rate cuts.
**Hassett’s Loyalty and Reform Pledge**
Trump hinted that a new Fed chair may be announced "early next year," with Hassett a top contender. Potomac River Capital’s Mark Spindel praised Hassett’s loyalty and ability to "translate" Trump’s rhetoric into coherent economics—and vice versa. Hassett has actively promoted his rate-cut credentials, crediting falling Treasury yields to speculation about his candidacy. But Spindel warned of risks: "No one can afford a bond market crash." Overly aggressive cuts could spark inflation fears, triggering a Treasury sell-off—dangerous amid heavy government borrowing.
Besant has also called for sweeping Fed reforms, criticizing regional bank presidents for overreach. He proposed requiring them to live in their districts for at least three years. Any new chair, especially Hassett, is expected to push for major institutional changes.