2026: The Year of Federal Reserve Leadership Transition

Article Author: Alex Krüger Article Translation: Block unicorn

Preface

The Federal Reserve as we know it will end in 2026.

The most important driver of asset returns next year will be the new Fed, especially the regime change brought by Trump’s new Fed chair.

Hassett has become Trump’s top choice to lead the Fed (with a 71% probability on Polymarket). Currently serving as Director of the National Economic Council, he is a supply-side economist and a longtime loyal supporter of Trump, advocating a “growth-first” philosophy. He believes that with the inflation fight basically won, maintaining high real interest rates is a matter of political stubbornness, not economic prudence. His potential appointment marks a decisive regime change: the Fed would shift from the technocratic caution of the Powell era to a new mandate that explicitly prioritizes lowering borrowing costs to advance the president’s economic agenda.

To understand the policy regime he would implement, let’s take a precise look at his statements on rates and the Fed this year:

• “The only explanation for the Fed not cutting rates in December is anti-Trump partisan bias.” (November 21)
• “If I were on the FOMC, I’d be more likely to cut, whereas Powell is less likely.” (November 12)
• “I agree with Trump that rates could be much lower.” (November 12)
• “The expected three rate cuts are just the beginning.” (October 17)
• “I want the Fed to keep cutting rates aggressively.” (October 2)
• “The Fed cutting rates is a step in the right direction towards much lower rates.” (September 18)
• “Waller and Trump are right on rates.” (June 23)

On a scale of 1-10 from dovish to hawkish (1 = most dovish, 10 = most hawkish), Hassett scores a 2.

If nominated, Hassett would replace Milan as Fed governor in January when Milan’s short-term tenure ends. Then in May, when Powell’s term expires, Hassett would be elevated to chair. Following historical precedent, Powell, after announcing his intentions months in advance, would resign his remaining governor seat, paving the way for Trump to nominate Walsh to fill the position.

Although Walsh is currently Hassett’s main competitor for the chair nomination, my core assumption is that he would be part of the reform camp. As a former Fed governor, Walsh has been “campaigning” on a platform of structural reform—openly calling for a “new Treasury-Fed accord” and attacking Fed leadership for succumbing to the “tyranny of the status quo.” Crucially, Walsh thinks the current AI-driven productivity boom is inherently deflationary, meaning that the Fed maintaining restrictive rates is a policy mistake.

The New Balance of Power

This setup would give Trump’s Fed a strong dovish core and credible voting influence over most easing decisions, though this isn’t set in stone and the degree of dovish tilt will depend on consensus.

• Dovish Core (4 people): Hassett (Chair), Walsh (Governor), Waller (Governor), Bowman (Governor).
• “Persuadable Moderates” (6 people): Cook (Governor), Barr (Governor), Jefferson (Governor), Kashkari (Minneapolis), Williams (New York), A. Paulson (Philadelphia).
• Hawks (2 people): Harker (Cleveland), Logan (Dallas).

However, if Powell does not resign his governor seat (which he’s very likely to do; all outgoing chairs in history have resigned, for example, Yellen resigned 18 days after Powell’s nomination), it would be extremely bearish. Not only would this block the vacancy needed for Walsh, but it would make Powell a “shadow chair,” forming another power center outside the dovish core, possibly with greater loyalty.

Timeline: Four Phases of Market Reaction

Considering all the above, the market reaction should be divided into four distinct phases:

There is immediate optimism over Hassett’s nomination (December) and a few weeks of bullish sentiment following confirmation, as risk assets would love to see a high-profile dovish loyalist in the chair.

If Powell does not announce his resignation from the board within three weeks, anxiety will grow, as each day that passes brings back the question: “What if he refuses to leave?” Tail risks come back to life.

The moment Powell announces his resignation, there is a wave of elation.

As the first FOMC meeting under Hassett’s leadership approaches in June 2026, the market grows nervous again, focusing on every word from FOMC voting members (who speak regularly, giving insight into their views and thinking).

Risk: A Divided Committee

Because the chair does not have the “deciding vote” that many imagine (in reality, there is none), Hassett must win the debate at the FOMC to secure an actual majority. Every 50 basis point move would produce a 7-5 split, which would cause corrosive institutional damage, signaling to the market that the chair is a political operator rather than a neutral economist. In extreme cases, a 6-6 tie or a 4-8 vote against a rate cut would be a disaster. The exact vote count will be released in the FOMC minutes three weeks after each meeting, turning these releases into major market-moving events.

What happens after the first meeting is the biggest unknown. My base case is that Hassett, if he can get four solid votes and a reliable path to ten, will forge a dovish consensus and execute his agenda.

Inference: The market cannot fully front-run the Fed’s new dovish stance.

Rate Repricing

The dot plot is just an illusion. Although the September dot plot forecast for December 2026 rates is 3.4%, that number represents the median of all participants, including hawks who do not have a vote. By anonymizing the dot plot based on public statements, I estimate the median for voting members is much lower, at 3.1%.

When I substitute Hassett and Walsh for Powell and Milan, the picture changes further. If Milan and Waller represent the new Fed’s aggressive easing stance, the 2026 voting distribution is still bimodal, but the peak is lower: Williams/Paulson/Barr at 3.1%, Hassett/Walsh/Waller at 2.6%. I anchor the new leadership’s rate at 2.6%, matching Milan’s official forecast. However, I note he’s indicated a preference for a “neutral rate” between 2.0% and 2.5%, meaning the new regime’s inclination may be even lower than projected.

The market has partially priced this in—on December 2, the December 2026 rate expectation was 3.02%—but it has not yet fully digested the magnitude of this regime change. If Hassett successfully leads rates lower, the short end of the yield curve would need to drop another 40 basis points. Furthermore, if Hassett is correct about supply-side deflation, inflation will fall faster than the market broadly expects, prompting even larger rate cuts to prevent passive tightening.

Cross-Asset Impact

While the first reaction to Hassett’s nomination should be “risk appetite up,” the exact manifestation of this regime change is “steepening inflation”—betting on aggressive short-term easing but expecting higher nominal growth (and inflation risk) in the long term.

Rates: Hassett wants the Fed to cut rates aggressively during recessions while maintaining 3%+ growth during booms. If he succeeds, 2-year Treasury yields should plunge to reflect rate cut expectations, while 10-year yields may stay high due to structurally higher growth and persistent inflation premia.

Equities: Hassett believes current policy is actively suppressing the AI-driven productivity boom. He would slash the real discount rate, driving growth stock multiples “through the roof.” The risk is not recession, but rather bond market turmoil if long yields spike in protest.

Gold: A politically unified Fed that clearly prioritizes economic growth over inflation targets is textbook bullish for hard assets. As the market hedges the risk of the new administration repeating the policy errors of the 1970s with excessive easing, gold should outperform Treasuries.

Bitcoin: Under normal circumstances, Bitcoin would be the purest “regime change” trade. However, since the shock on October 10, Bitcoin has shown severe downside skew, weak macro rebound momentum, and crashes hard on any negative news—mainly due to rising worries over the “four-year cycle” and a crisis in Bitcoin’s own positioning. I believe that by 2026, Hassett’s monetary policy and Trump’s deregulation agenda will overcome today’s dominant self-fulfilling bearish sentiment.

Technical Note: The “Tealbook”

The Tealbook is the Fed staff’s official economic forecast and the statistical baseline for all FOMC discussions. The report is prepared by the Research & Statistics division, led by Director Tevlin, which has over 400 economists. Tevlin, like most of her staff, is a Keynesian, and the Fed’s main model (FRB/US) is explicitly New Keynesian.

Hassett could appoint a supply-side economist to lead the division via a board vote. Replacing a traditional Keynesian (who thinks growth leads to inflation) with a supply-sider (who thinks the AI boom will be deflationary) would significantly change forecasts. For example, if the division’s model predicts inflation will fall from 2.5% to 1.8% due to higher productivity, even less dovish FOMC members may be more willing to vote for aggressive rate cuts.