What Happens If Kevin Hassett Becomes Fed Chair?

Episode Summary

Executive Summary: The episode examines the likely nomination of Kevin Hassett as the next Fed chair and what a Trump-aligned Fed could mean for interest rates, credibility, and institutional independence. Guests argue Hassett is Trump’s most loyal economics adviser, markets have not reacted negatively, and the bigger question is whether the Fed’s internal checks can withstand political pressure amid disputes over board appointments, inflation, and AI-driven productivity hopes.

Main Topics: Kevin Hassett as likely Fed chair (Priority: 5/5): The discussion centers on Bloomberg reporting that Hassett is the leading candidate to replace Jerome Powell when the chair term ends in May, and why Trump may favor him over other contenders. Loyalty vs. Fed independence (Priority: 5/5): Speakers debate whether a Trump loyalist can still act independently, with Hassett arguing that White House veterans have historically served the Fed well and Anna Wong emphasizing that loyalty is the dominant selection criterion. Market reaction and credibility (Priority: 4/5): The hosts assess whether markets would punish a Hassett nomination. They note the initial reaction was positive, with lower rates and a strong Treasury auction, which may reduce fears about his credibility. Trump’s broader effort to shape the Fed (Priority: 5/5): The conversation places the nomination in a wider campaign to influence the Federal Reserve through personnel, including attempts to pressure Powell and remove or marginalize Biden-appointed governors. Board composition, legal fights, and timing (Priority: 4/5): The episode explains how the Lisa Cook case, Adriana Kugler’s resignation, and Stephen Miran’s temporary seat create openings that could affect Trump’s control over the Board and future regional Fed appointments. Rates, inflation, and the AI productivity thesis (Priority: 4/5): The speakers explore Hassett’s belief in a productivity boom from AI and how that might justify lower rates, while warning that pushing rates too low could trigger a boom-bust cycle and renewed inflation. Fed governance and soft power (Priority: 5/5): The discussion concludes that a chair’s success depends less on formal authority than on soft power and consensus-building within the FOMC, especially if colleagues suspect the chair is acting as Trump’s proxy.

Key Arguments: Hassett is the most likely pick because loyalty is Trump’s top criterion, and Hassett has repeatedly delivered on Trump’s signature economic priorities, especially the Tax Cuts and Jobs Act. A White House veteran can still be an independent Fed leader; Hassett argues that past presidents’ advisers have gone on to serve the Fed without sacrificing independence. Markets have thus far treated a Hassett nomination as non-disruptive, suggesting traders may not view his appointment as a credibility shock. The Trump administration is using personnel appointments and legal pressure to expand influence over the Fed, not just by naming a chair but by shaping the board. The key legal and timing battle is whether Trump can gain enough board control to influence regional Fed president reappointments, especially around the February 2026 deadline. Hassett’s strongest intellectual case is that AI could be driving a genuine productivity boom, which would allow faster growth and lower inflation even with easier monetary policy. Anna Wong argues that if the productivity boom is real, it may first show up as weaker employment growth, especially among younger workers, before broader gains arrive. Ultimately, the next chair’s ability to steer policy will depend on soft power and trust inside the FOMC; if members see the chair as a political proxy, consensus will break down.

Data Points: Fed chair term end: May next year - Jerome Powell’s term as chair is ending, opening the race for a successor. Number of shortlist candidates: 5 - The president has five candidates on his shortlist for the next Fed chair. Bloomberg report timing: last week - Bloomberg reported that Kevin Hassett was looking very likely to be selected. Interview length with Hassett: 45 minutes - Anna Wong spoke with Kevin Hassett at a Bloomberg event in Washington. Working hours cited by Hassett in memoir: 60–80 hours every day - Wong referenced Hassett’s memoir describing intense work at the CEA before his health scare. Treasury auction response: very positive - Hassett said markets reacted positively after the nomination report surfaced. Interest rates after report: went down - Hassett pointed to falling rates as evidence markets welcomed the possibility. Desired policy rate mentioned by Trump: 1% - Wong referenced Trump’s reported preference for much lower interest rates. GDP growth forecast under 1% rates: more than 3% to 4% in 2026–2027 - Wong predicted a temporary boom if rates were cut to 1%. Inflation forecast under 1% rates: above 3%, possibly 3.5% - Wong warned of renewed inflation if rates were cut too far. Supreme Court hearing: mid-January - The Court will hear arguments on the Lisa Cook firing case in January. Regional Fed reappointment deadline: end of February - Anna Wong said this is the key timing window for board influence over regional Fed presidents. Board composition: 7 governors and 12 regional presidents - Wong explained the Fed’s governance structure and how board control affects regional appointments. Age of some regional Fed presidents: 50s - The speakers noted many regional presidents are relatively young and could remain in place into the 2030s.

Pivotal Quotes: "I think the idea that government service makes it less likely that you'll pursue an independent Fed basically rejects the evidence." — Kevin Hassett: Hassett argues that prior White House service does not prevent a future Fed chair from acting independently. "My criteria for Trump's pick is number one loyalty." — Anna Wong: Wong explains why she believed Hassett was always the most likely nominee. "It sounds like he was even trying to make sure there wouldn't be any change of mind and try and remove any last bit of doubt from President Trump's mind." — Stephanie Flanders: Flanders interprets Hassett’s public remarks as reinforcing his loyalty and candidacy.

Implications: If Hassett is chosen, the Fed could face heightened political scrutiny even if markets stay calm initially. The real test will be whether he can build trust inside the institution and preserve consensus while Trump pushes for easier money and broader control.