ROI-Hassett may be 'shadow Fed Chair' for five months: Mike Dolan

By Mike Dolan

LONDON, Dec 1 (Reuters) - If White House adviser Kevin Hassett becomes President Donald Trump's pick to head the Federal Reserve from May, he will effectively serve as a "shadow Fed Chair" for five months - with markets hanging on his every word.

Ever since Trump made clear he wanted to fire current Fed Chair Jerome Powell - or at least deny him a second term - investors have wondered how the succession would unfold. Delaying the announcement until now has shortened the period of parallel chairs but markets are now about to find out what a five-month overlap is like.

Just before the Thanksgiving break, Treasury Secretary Scott Bessent indicated that Trump would likely announce the nominee before Christmas and that five names remained in the hat.

Within hours, Bloomberg reported from sources that National Economic Adviser and White House aide Hassett was the frontrunner.

Betting markets such as Polymarket reacted instantly, putting his odds above 50% for the first time - more than double the roughly 22% chance assigned to Fed Governor Christopher Waller, who had previously been neck and neck with Hassett for the job.

For now, Hassett appears the most likely to get the nod.

Some see that prospect as a klaxon about the politicization of the central bank. Another Trump adviser Stephen Miran holds one of the seven board seats, and two carryovers from Trump's first term - Waller and Michelle Bowman - remain in place. Lisa Cook's legal case in January could well open up yet another position.

With Powell's replacement, that would then give Trump appointees a significant 5-2 majority on the board.

The question for markets then is not just the direction of interest rates, but the extent to which the board supports the president's wish to floor rates even if inflation remains high and growth hot.

Miran is a staunch advocate of the steep 2-3 percentage point cuts Trump has publicly demanded. Waller and Bowman have turned markedly dovish since Trump returned to office - notably as other Fed officials have urged caution about inflation that's still about a percentage point above the 2% target.

Wall Street stocks and the U.S. housing sector might reasonably cheer that prospect of pumped-up nominal growth. But Treasury debt risk premiums, a steeper yield curve and market gauges of inflation expectations will all now be under a microscope in a fixed-income world more wary of real returns.

Perhaps the cleanest price response may simply be to resume selling the U.S. dollar. And a relapse of the greenback's early 2025 weakness may already be underway since last week.

POLITICAL CAPTURE?

Global central bankers tend to push back against the idea that Fed independence is at risk, preferring to rely instead on past performance and how the Fed and other central banks pushed through unpopular post-pandemic tightening despite widespread fears of "fiscal dominance."

Many also insist that while appointments can be political, behavior in office is constrained by law, mandates, and the need to preserve credibility - forces that often pull the most overtly political appointees back to central banking orthodoxy.

That only heightens the importance of the five months in which the nominee will be an effective "shadow Fed Chair."

If it's Hassett, markets tend to think he will be more politically influenced than Waller. Although both have backgrounds as central bank economists, Hassett is coming directly from the administration, while Waller has spent the past five years inside the Fed.

Much will hinge on what is said as the transition nears. The chair is more than just another vote on the policymaking council, but traditionally a consensus builder and influential voice and, in a split decision, the holder of the casting vote.

Hassett's existing role means he has been quite vocal all year. Only last month, he had at least half a dozen media interviews or set-piece speeches.

As a flavor of his views, Hassett sees no real argument to stop interest rates falling further; he has warned about a "partisan" Fed and claimed there would be no political "coercion" of the central bank; downplays tariff-related price pressures as mostly one-off; and says a plan for 50-year mortgages is "on the table."

Broadly, Hassett is viewed as a conservative economist with some free-trade sympathies and a few wild-card ideas.

Most famously, he co-authored the book "Dow 36,000" near the peak of the dot-com bubble in 1999, which argued the equity index could more than triple its then value within five years and that stocks were actually less risky than bonds.

The Dow did eventually get to 36,000 - but only 21 years later, and not before losing more than a third of its value between 2000 peaks and the troughs of 2002.

Apart from that, there haven't been many other wild statements.

But if Hassett gets the green light for the top Fed job this month, his every public utterance could be market-moving. How his views compare and contrast with Powell's over that period will be forensically examined - with the chance of considerable market volatility where they differ.

The opinions expressed here are those of the author, a columnist for Reuters

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(by Mike Dolan; Editing by Marguerita Choy)