Kevin Hassett the next Fed Chair Could Make Bonds Risky Again
- Prediction markets favor Kevin Hassett as the next Fed Chair which raises concerns about a shift toward growth over inflation control.
- A policy pivot that neglects price stability could unanchor inflation expectations and destroy the protective value of bonds in portfolios.
- Strategists are closely monitoring breakeven inflation rates for signs that the market is losing faith in the Fed's commitment to fighting inflation.
The financial world is bracing for a potential shake up at the Federal Reserve. Prediction markets currently favor Kevin Hassett as the leading candidate to replace Jerome Powell. Hassett serves as the director of the National Economic Council and is a top economist in the White House. His potential nomination signals a shift that could fundamentally alter how investors construct their portfolios. The bond market specifically faces a unique threat if the central bank changes its priorities.
Bonds have traditionally served as the boring but safe bedrock of investing. They provide stability and income when stocks get volatile. This safety relies entirely on the credibility of the Federal Reserve. Investors trust the central bank to keep inflation low and stable. A change in leadership could erode that trust. Lawrence Gillum is the chief fixed income strategist for LPL Financial and he warns that a Hassett led Fed might prioritize economic growth over price stability.
This shift in focus would be a nightmare for fixed income investors. A central bank that chases growth at the expense of inflation control unanchors market expectations. Inflation is the natural enemy of bonds because it destroys the purchasing power of their fixed interest payments. If the market believes the Fed will let inflation run hot to boost the economy then bond prices will collapse. Gillum notes that while this is not the base case it remains a significant risk worth monitoring.
We already saw a preview of this dynamic during the market turmoil of 2022. Inflation spiked and forced both stocks and bonds to crash simultaneously. The traditional 60/40 portfolio mix failed completely during that period. This historically reliable strategy depends on bonds rising when stocks fall. That inverse relationship breaks down when inflation is the primary driver of market stress. A Fed chair who is too hesitant to raise rates could make that breakdown permanent.
Hassett has made his dovish views quite clear in recent public appearances. He told Fox News in November that he would be cutting rates immediately if he were in charge. He also indicated a preference for larger 50 basis point cuts during an event with the Economic Club of Washington. These statements align closely with Donald Trump’s desire for lower interest rates. This alignment suggests that a Hassett chairmanship would face immense political pressure to keep money cheap regardless of inflation data.
The market is currently reacting with caution rather than panic. Breakeven inflation rates have edged up only slightly since rumors of his nomination gained traction. The yield curve has steepened modestly but traders are not yet pricing in a disaster. Gillum is watching the five year breakeven inflation rate closely. It currently sits near 2.3 percent. If that number starts creeping toward 3 percent it would signal that investors are losing faith in the Fed’s ability to control prices.
The ultimate risk is a departure from the dual mandate balance of the past. The Federal Reserve is tasked with managing both employment and price stability. A shift toward a "growth first" mandate effectively abandons the fight against inflation. This would strip bonds of their safe haven status and force investors to rethink their entire strategy. We are not there yet but the nomination of a growth focused economist like Hassett brings that reality much closer.