This week's Federal Reserve decision "script": Decision to cut interest rates, Powell's "hawkish speech," Hasset and Bessent's "dovish hedge"?

This week's market expectations for the Federal Reserve's interest rate meeting are forming a clear "script."

On Monday, according to analysis by Academy Securities strategist Peter Tchir, the market has priced in a 95% probability for a rate cut in December, but Powell's hawkish statements may no longer be significant— as the soon-to-be "lame duck" Federal Reserve Chairman, his comments are losing influence over policy after the new year.

Nomura stated that if the market reacts "honestly" to the "hawkish rate cut," it would be a reversal of liquidity: bonds and stocks would weaken due to profit-taking, the dollar would strengthen, and U.S. tech and growth stocks would face valuation pressure. If market performance is based on the "Hassett trade," the U.S. Treasury yield curve would steepen, global economic recovery expectations would heat up, cyclical stocks would perform well, while the dollar would come under pressure again.

It is noteworthy that the market may be underestimating the degree of dovish coordination between the Treasury, the Federal Reserve, and the White House in the future, as well as the "out-of-the-box" policy tools that may be adopted to achieve the "3-3-3 target" (3% economic growth, 3% short-term yields, and 10-year Treasury yields maintained in the 3% range).

As Trump is about to announce the new Federal Reserve Chairman candidate, National Economic Council Director Kevin Hassett has become the strongest candidate. Treasury Secretary Mnuchin not only needs to find a suitable Federal Reserve head for Trump but also ensure that the new chairman can quickly push for rate cuts; otherwise, his own position may be at risk. Trump has made it clear that Mnuchin's fate is closely tied to the direction of Federal Reserve policy.

This personnel change and the expected policy coordination behind it are reshaping the market's judgment on the monetary policy path for 2025. Investors need to reassess the traditional framework of Federal Reserve independence and the unprecedented coordination between fiscal and monetary policy that may impact the market.

Market Consensus and Powell's "Lame Duck" Dilemma

Peter Tchir pointed out that if we summarize this week's Federal Reserve meeting in the simplest terms, it would be: the market has priced in a 95% probability for a rate cut, and the Federal Reserve will not disappoint the market. But the key is that Powell, as the outgoing chairman, will have significantly less weight in his hawkish remarks.

This contrasts sharply with previous Federal Reserve decision days. Typically, the chairman's press conference is the focal point of market attention, and hints about future policy paths often trigger significant market volatility. However, in the current situation, investors are more concerned about who will succeed Powell and what policy shifts the new chairman will bring.

Tchir believes that the current market pricing has not fully reflected two key factors: first, the high level of coordination that will emerge between the Treasury, the Federal Reserve, and the White House; second, the unconventional tools that may be adopted to achieve policy goals, including quantitative easing, twist operations, and even yield curve control measures.

When "Hawkish Rate Cuts" Meet the "Hassett Trade," Two Major Market Reactions May Occur

Nomura Securities senior analyst Naka Matsuzawa has issued a warning to the market: while the market is eagerly anticipating a rate cut from the Federal Reserve, this could be a "hawkish rate cut" full of traps.

Matsuzawa's core argument points to the current contradictory mindset of the market. He believes that the FOMC is very likely to implement a hawkish rate cut—meaning that while cutting rates, it will raise the threshold for future cuts to appease the hawkish members of the committee. If the market reacts "honestly" to this, it would be a liquidity reversal: bonds and stocks would weaken due to profit-taking, while the dollar would strengthen. However, U.S. tech and growth stocks are currently mainly driven by liquidity, and once the expectations for a rate cut are dashed or repriced, these sectors will face significant valuation pressure.

But this is not the only scenario. If the market ignores the Fed's hawkish signals and continues to celebrate, the driving force behind it can only be the so-called "Hassett trade." This trade is based on bets for a more accommodative policy from the new Fed chair, reflation, and a decline in confidence in the dollar. In this scenario, the yield curve would steepen, global economic recovery expectations would rise, cyclical stocks would perform well, and the dollar would come under pressure again.

Secretary Mnuchin's Dual Pressure and Coordinating Role

Treasury Secretary Mnuchin is facing unprecedented pressure. Trump has made it clear that Mnuchin's performance will be directly linked to Fed policy. In a speech last month, Trump even joked, "The only thing Mnuchin has messed up is the Fed. If you can't fix it soon, you're fired."

This statement is not without basis. In August of this year, Trump harshly criticized his first-term Treasury Secretary Steven Mnuchin on social media, claiming that Mnuchin's recommendation of Powell as Fed chair was a "blunder" that caused "incalculable" damage. This precedent has made Mnuchin acutely aware that the choice of Fed personnel will directly impact his political future.

According to a recent report by The New York Times, Mnuchin emphasized the limitations of the Fed chair's powers at last Wednesday's New York Times DealBook conference. He stated, "The Fed chair has the ability to push and initiate discussions, but ultimately, he or she only has one vote." This statement serves to cool market expectations and suggests that future policies will require close cooperation between the Treasury and the Fed.

Traditionally, the Treasury Secretary and the Fed chair have dinner together weekly to discuss economic conditions. However, Mnuchin has shown a willingness to break with tradition. Earlier this year, he hinted that Fed officials make decisions based on political considerations and accused them of suffering from "tariff confusion syndrome." On Wednesday, he cited economic weakness in areas such as real estate, advocating for a rate cut by the Fed.

Hassett's Loyalty and Reform Commitment

Trump stated on Tuesday that the new Fed chair candidate may be announced "early next year," with Hassett being the strongest candidate. Mark Spindel, Chief Investment Officer of Potomac River Capital, commented that Hassett has a high level of loyalty and possesses a unique ability to translate—both converting Trump-style expressions into rigorous and coherent economics and vice versaHassett himself is also actively demonstrating his ability to promote interest rate cuts. According to CBS News, he stated on Sunday: "I think the American people can expect President Trump to choose someone who can help them get cheaper auto loans and lower rate mortgages. This is the market's reaction to the rumors about me." He attributed the decline in long-term Treasury yields to the news of his becoming a popular candidate.

But Spindel also pointed out potential risks: "No one can afford a collapse in the bond market. This has always been a concern in Bessent's policy thinking." If Hassett pushes too hard for interest rate cuts, it could raise doubts among Wall Street investors about the Federal Reserve's commitment to controlling inflation, leading to a sell-off in Treasuries and rising borrowing costs, which is particularly dangerous in the context of the government issuing a large amount of debt.

Bessent also called for a comprehensive reform of the Federal Reserve, accusing its staff of "overstepping their bounds." On Wednesday, he directed his criticism at the 12 regional reserve bank presidents, complaining that some officials do not come from the regions they represent, and suggested that future regional Federal Reserve chairs must reside in their districts for at least three years to be eligible for the position. It is expected that Hassett or any nominated candidate will push for a thorough reform of the institution once in office.

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