PGIM warns: Even with Harker at the helm of the Federal Reserve, there is no ability to "quickly cut interest rates" as Trump wishes

Recently, Gregory Peters, Co-Chief Investment Officer of PGIM Fixed Income, warned in a media interview that even if the current Director of the White House National Economic Council, Hassett, is ultimately appointed as the next Federal Reserve Chair, he may not have the ability to achieve the rapid interest rate cuts that Trump desires, as the Fed's interest rate decisions are ultimately made collectively by the committee.

This warning comes at a time when the market is buzzing about the possibility that Hassett, if he leads the Fed, might adopt aggressive monetary easing policies to cater to Trump. Trump stated this week that the race for Fed Chair has "narrowed down to one person," referring to Hassett as a "potential candidate for Fed Chair," making Hassett the frontrunner for the position.

Hassett's rise as a leading candidate has sparked a new round of investor concerns regarding the independence of the Federal Reserve. Peters pointed out that this concern is translating into risk premiums and being factored into the pricing of global sovereign bonds. He emphasized that the Fed's independence "remains a major concern for investors."

However, despite the market's heightened attention, U.S. Treasury yields remained stable on Thursday, with the benchmark 10-year Treasury yield holding at 4.08%, and the policy-sensitive 2-year Treasury yield rising by 1 basis point to 3.50%.

One person's power cannot shake collective decision-making

Peters' core argument is that the personal will of the Fed Chair cannot fully dominate the direction of monetary policy. Since interest rate decisions are made by the Federal Open Market Committee (FOMC) through voting, the Chair needs to have sufficient credibility to build consensus within the committee.

"Does he have the credibility to drive consensus within the committee?" Peters questioned in the media interview, providing his own judgment:

"We don't know the answer. But I don't think he has that kind of credibility. I think that's the message the bond market is trying to tell you."

According to previous media reports, bond investors, including members of the U.S. Treasury Borrowing Advisory Committee, have expressed concerns to the U.S. Treasury regarding Hassett's potential appointment as Fed Chair.

In response to external doubts, Hassett rebutted this week. He cited a strong U.S. Treasury auction result as a sign that the market is not panicking over rumors of his possible succession. He himself has remained low-key about the likelihood of his nomination.

Despite skepticism from institutions like PGIM, Hassett is widely regarded as a supporter of Trump's low-interest rate preferences. As he becomes the leading candidate, some traders have begun to increase their positions, betting that the Fed will accelerate its pace of interest rate cuts.

Concerns over Fed independence, market pricing in risk premiums

Hassett's rise comes against the backdrop of strained relations between the Trump administration and the Federal Reserve. Over the past few months, Trump has launched unprecedented attacks on the Fed, including verbal assaults on current Chair Powell and attempts to oust board member Lisa Cook Peters stated that many large macro fund managers and bond traders are assessing the potential impact of Trump's reorganization of the Federal Reserve, as any hints of policy changes could stir global markets. "The market is focused on what will happen next," he said, "which includes the new Federal Reserve chairman, the new committee composition, and frankly, the administration's interference in Federal Reserve affairs."

Concerns about the independence and credibility of the Federal Reserve are leading to risk premiums and term premiums being factored into the yield curve. Peters pointed out that this phenomenon "is not only occurring in the United States but is widespread across all sovereign bond markets." He added:

"It depends on the area you are focusing on—the back end of the bond market remains quite weak."

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