analysis
US Federal Reserve
Kevin Hassett – a Fed chief at Trump’s behest?
Trump henchman Kevin Hassett is seen by the markets as the most likely successor to Jerome Powell at the head of the US Federal Reserve. Experts see the Fed’s independence at risk.
Is the US Federal Reserve providing pre-Christmas presents on the stock markets? Investors are certainly very optimistic about interest rates ahead of the Federal Reserve’s (Fed) interest rate decision this evening. According to the CME Group’s Fed Watch Tool, around 90 percent of market participants expect an interest rate cut of 0.25 percentage points. The main reason for this is the weak labor market.
As far as the future monetary policy outlook is concerned, there is currently an unusually deep division within the Fed. The central bank is divided like rarely before. There is also another uncertainty factor: Jerome Powell’s term as Fed Chairman ends in May.
“Looking ahead to the coming year, we only expect one more interest rate cut by May,” emphasizes Jörg Krämer, chief economist at Commerzbank. After that, under Powell’s successor, the rate of interest rate cuts is likely to increase significantly again.
Trump has a favorite
But who will succeed Powell at the head of the central bank? The guesswork on the markets will soon come to an end. Trump announced during a Cabinet meeting at the White House last week that he would announce the new chairman “early next year.” And he already has a personal favorite, as he made clear afterwards.
“I assume a potential Fed chief is here too,” Trump said. “I don’t know who’s allowed to say that – potentially. He’s a respected person, I can assure you. Thank you, Kevin.”
What does Kevin Hassett stand for?
This refers to Kevin Hassett, currently director of the National Economic Council – and therefore Trump’s top economic advisor. As such, he is likely to pursue a clear agenda at the helm of the US Federal Reserve.
“A Fed Chairman Kevin Hassett would advocate an even more growth-friendly course,” emphasizes Georg von Wallwitz from asset manager Eyb & Wallwitz. Hasset believes that the risks of a too tight monetary policy are greater than the risks of higher inflation. Von Wallwitz is convinced: “Under Hassett, the Fed would take a more aggressive course.”
Hassett is loyal to Trump
That would be a monetary policy entirely to Trump’s liking. After all, the US President had repeatedly tried in recent months to pressure the central bank to lower interest rates more.
These attempts to exert influence rubbed off on current Fed Chairman Powell – but that is likely to change under Hassett. Because Hassett is “very, very loyal” to President Trump, as Michael Brown, senior research strategist at Pepperstone, emphasizes.
US interest rates up soon Seven-year low?
“If Hassett takes over, the American central bank will be able to significantly reduce the key interest rate to 2.5 percent,” Commerzbank chief economist Krämer is convinced. For comparison: the key interest rate in the USA has not been this low in seven years.
Although this is likely to boost the stock markets, at least in the short term, stock market experts and economists are still enthusiastic about this prospect. They fear that an overly aggressive interest rate cutting policy could trigger a new wave of inflation.
The latest market reactions also point in this direction: yields on ten-year US government bonds rose, while the dollar lost value.
Wall Street bankers worried about Hassett
According to the Financial Times, several senior Wall Street bankers and investors have already expressed their concerns to the US Treasury about the possible appointment of Kevin Hassett as Fed chief.
They fear that Hassett could arbitrarily lower interest rates just to please Trump. And that’s even if inflation remains above the Fed’s two percent target. Some market experts would therefore have preferred other candidates such as Rick Rieder from BlackRock or Fed Governor Christopher Waller, as they are considered more independent of Trump.
1970s as a warning example
The big danger: The reputation of the Fed institution could suffer massively under a boss who primarily acts at the behest of the US President. A look at history shows what dramatic consequences this can have. UBS chief economist Paul Donovan is not the only one who fears parallels to the 1970s.
At that time, Fed Chairman Arthur Burns kept interest rates artificially low under pressure from US President Richard Nixon. The consequence: prices shot up. At the end of the decade, inflation was over 13 percent – at the same time the economy was stagnating.
It was only in the 1980s that this “stagflation” was stopped by the new Fed chief Paul Volcker: with drastic interest rate increases of more than 20 percent. The “Volcker shock” triggered a severe recession, but ultimately managed to curb inflation – and restore the Fed’s credibility.
US government bonds and dollars as “first victims”
Since then, the Fed’s independence has been considered sacrosanct. It is the basis for the dollar’s status as a world reserve currency and for the attractiveness of US government bonds as a “safe haven”.
A central bank chief who only bows to the will of the US President would erode investors’ trust in the credibility and reliability of the Fed. This could lead to massive upheavals on the stock markets.
“It is crucial for the markets that Hassett shows in the event of higher inflation: Even if the wind blows from Washington, the Fed remains the helmsman of its own course – and does not let inflation continue,” emphasizes von Wallwitz. If he doesn’t succeed, you would see it very clearly in the reactions of the financial markets: “US government bonds and the dollar would be the first victims.”
Woe betide you if the Fed’s independence is attacked
In the next step, this would also deprive the USA of the opportunity to refinance its gigantic national debt, currently over $38 trillion, through the capital markets.
If Kevin Hassett actually becomes the new Fed chief and ends up just acting as Trump’s assistant, this would have consequences far beyond the USA. Nothing less than the stability of the global financial system would be at stake.
