Key prediction market putting strong odds on BlackRock's Rieder as next Fed chair

By Michael S. Derby

Jan 27 (Reuters) - BlackRock's (BLK) chief bond investment manager Rick Rieder is now the clear favorite to succeed current Federal Reserve Chair Jerome Powell when his term is up, according to prediction market Kalshi.

On Tuesday, a day ahead of the outcome of the latest interest-rate-setting Federal Open Market Committee meeting, those who are willing to put money on the line to bet on the succession race put a 48% probability on Rieder becoming??Fed leader.

Meanwhile, bettors said former Fed Governor Kevin Warsh has a 31% chance of becoming Fed chair, while current ?Fed Governor Christopher Waller, who is viewed very favorably by many market participants, has an 8% chance of getting the job, not far from where former Fed chair front-runner and current presidential economic advisor Kevin Hassett's odds ?now lie.

Rieder's prospects as viewed by the Kalshi users have jumped since the start of the year. Powell, who has been Fed Chair since 2018, will ?see his leadership term end in May, although he can hold his governor slot until 2028.

Rieder's surge comes as ?the money manager is widely seen as ?aligned with Trump's central bank priorities.

Rieder "would be dovish on rates and likely press for three cuts this year based on his read that the micro data shows strong productivity dynamics, inflation pass-through from tariffs gradually moving ?into the rear-view mirror, and secular as well as cyclical pressures on labor and ?low-income consumers," said analysts at Evercore ISI, in a note from Sunday.

Michael Strain, director of economic policy studies at the American Enterprise Institute, said Rieder's ascendance reflected Trump's dissatisfaction with other contenders for the job.

Strain added Trump's first choice was Treasury Secretary Scott Bessent, and ?said he could see Trump pressuring Bessent in coming months. "The president seems to ?have his heart set ?on Secretary Bessent, but Bessent seems uninterested for some reason. I think the question is, how long can Bessent hold out."

INDEPENDENCE TEST

Trump has aggressively targeted the Fed since returning to office and has lambasted the institution, as well as Powell, for not cutting interest rates as quickly ?as he'd like, even as inflation remains above the Fed's 2% target and has actually gotten worse due to the president's wide-ranging imposition of taxes on goods coming into the country.

The Fed cut its interest rate target by three quarters of a percentage point last year and while it is expected to hold rates steady this week, it remains possible more rate cuts will happen this year as inflation pressures are expected to wane.

Trump has said that one of his requirements for a new Fed chair is a willingness to pursue interest rate cuts, which could potentially push up growth for a spell and ease government borrowing costs, at the ?risk of higher inflation.

The ?pressure the president has placed on the Fed, which has included repeated threats to fire Powell, as well as his administration launching a criminal investigation into a central bank renovation effort, has raised very serious questions about the independence of the next Fed leader.

The Fed was charged ?by Congress with keeping inflation low and steady and job growth as strong as it can be, and it is set up to pursue those mandates without political pressure. Fed officials, many market participants as well as elected leaders, agree that central bank independence is critical to achieving those goals, as it allows central bankers space to make decisions based on data rather than political considerations.

Many market participants believe Trump's approach to the Fed has made the role of Fed chair a poisoned chalice, as many will doubt the next Fed leader will be able to operate with the level of independence needed to successfully achieve the central bank's mission.

And given how the Fed sets monetary policy, Powell's successor, depending on the positions ?the incoming chair pursues, may even find himself outvoted on the FOMC.

The next Fed chair "will have to make their best arguments to the rest of the committee on what monetary policy is appropriate to achieve the dual mandate that we are all charged by Congress to try to achieve," Minneapolis Fed leader Neel Kashkari said on January 14. "That person gets one vote, and, you know, the best argument wins, ?and so I feel very...confident that the committee will continue to make the best decisions we can."

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(Reporting by Michael S. Derby and Andrea Shalal; Editing by Andrea Ricci )