2026: The Year of Federal Reserve Leadership Transition

Written by: Alex Krüger

Translated by: 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 shift brought about by Trump’s appointment of a new Fed Chair.

Hassett has become Trump’s top pick to lead the Fed (71% probability on Polymarket). Currently serving as Director of the National Economic Council, he is a supply-side economist and a longtime loyal Trump supporter, advocating a “growth-first” philosophy. He believes that with the anti-inflation war largely won, maintaining high real rates is a political stubbornness rather than an act of economic prudence. His potential appointment marks a decisive regime shift: the Fed will move away from the technocratic caution of the Powell era and toward a new mission that explicitly prioritizes lower borrowing costs to advance the President’s economic agenda.

To understand the policy framework he would implement, let’s precisely assess his statements on interest rates and the Fed this year:

“The only explanation for the Fed not cutting rates in December is anti-Trump partisan bias.” (Nov 21)

“If I were on the FOMC, I’d be more likely to cut rates, whereas Powell would be less likely.” (Nov 12)

“I agree with Trump that rates could be much lower.” (Nov 12)

“The expected three rate cuts are just the beginning.” (Oct 17)

“I want the Fed to keep making big rate cuts.” (Oct 2)

“The Fed’s rate cuts are a move in the right direction—toward much lower rates.” (Sep 18)

“Waller and Trump are right about rates.” (Jun 23)

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

If nominated, Hassett will take over from Mullan as Fed governor in January, when Mullan’s short-term tenure ends. Then, in May, when Powell’s term ends, Hassett will be elevated to Chair. By historical precedent, Powell, after announcing his intentions several months in advance, will resign from the remaining Board seat, paving the way for Trump to nominate Warsh to fill the position.

Although Warsh is currently Hassett’s main rival for the Chair nomination, my core assumption is that he will be included in the transformation camp. As a former Fed governor, Warsh has been “campaigning” on a platform of structural reform, explicitly calling for a “new Treasury-Fed accord” and criticizing the Fed leadership for succumbing to “the tyranny of the status quo.” Crucially, Warsh believes that the current AI-driven productivity boom is inherently deflationary, which means the Fed’s maintenance of restrictive rates is a policy mistake.

A new balance of power

This setup will give Trump’s Fed a strong dovish core, with credible voting influence on most easing decisions, though nothing is set in stone, and the degree of dovish tilt will depend on consensus.

Dovish core (4): Hassett (Chair), Warsh (Governor), Waller (Governor), Bowman (Governor).

“Persuadable centrists” (6): Cook (Governor), Barr (Governor), Jefferson (Governor), Kashkari (Minneapolis), Williams (New York), A. Boulson (Philadelphia).

Hawks (2): Harker (Cleveland), Logan (Dallas).

However, if Powell does not resign his Board seat (which is highly unlikely; all former Chairs have resigned after stepping down, e.g., Yellen resigned 18 days after Powell was nominated), it would be extremely bearish. Not only would this block the vacancy needed for Warsh, but it would also make Powell a “shadow Chair,” forming another power center outside the dovish core, potentially with greater loyalty.

Timeline: Four stages of market reaction

Taking all the above into account, market reactions should break down into four distinct phases:

There’s an immediate bullish response to Hassett’s nomination (December) and a few weeks of bullish sentiment after confirmation, as risk assets will love a high-profile dovish loyalist taking the Chair.

If Powell doesn’t announce his Board resignation within three weeks, anxiety will grow, as each day raises the question: “What if he refuses to leave?” Tail risk will resurface.

The moment Powell announces his resignation brings a wave of euphoria.

As the first FOMC meeting under Hassett’s leadership approaches in June 2026, markets become tense again, scrutinizing every word from FOMC voters (who speak regularly, offering glimpses of their views and thinking).

Risk: A divided committee

Since the Chair does not have the “tie-breaking vote” many imagine (in fact, there is none), Hassett must win debates within the FOMC to achieve a true majority. Every 50-basis-point move will result in a 7–5 split, causing institutional damage by signaling to markets that the Chair is a political operator, not an impartial economist. In extreme cases, a 6–6 tie or a 4–8 vote against cuts would be disastrous. Exact vote counts are published 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 if Hassett gets four firm votes and a reliable path to ten, he’ll build a dovish consensus and pursue 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 projects a 3.4% rate for December 2026, that number represents the median of all participants, including hawks who don’t vote. By anonymizing the dot plot based on public statements, I estimate the real median for voters is much lower, at 3.1%.

When I swap in Hassett and Warsh for Powell and Mullan, things shift further. If Mullan and Waller represent the new Fed’s aggressive rate-cutting stance, the 2026 voting distribution remains bimodal but with a lower peak: Williams/Boulson/Barr at 3.1%, Hassett/Warsh/Waller at 2.6%. I anchor the new leadership’s rate at 2.6%, matching Mullan’s official forecast. However, I note that he has indicated a preference for a “neutral rate” between 2.0% and 2.5%, implying the new regime’s bias could be even lower than forecast.

The market has partially recognized this: as of December 2, the December 2026 rate expectation is 3.02%, but the full extent of the regime shift is not yet priced in. Should Hassett succeed in guiding rates lower, the short-end yield curve will need to drop another 40 basis points. Furthermore, if Hassett’s supply-side deflation prediction is correct, inflation will fall faster than widely expected, prompting even greater rate cuts to avoid passive tightening.

Cross-asset impact

Although the initial reaction to Hassett’s nomination should be “risk-on,” the precise manifestation of this regime shift is “steepening inflation”—that is, betting on aggressive easing in the short term but expecting higher nominal growth (and inflation risk) in the long term.

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

Equities: Hassett believes current policy is actively suppressing the AI-driven productivity boom. He’ll sharply lower the real discount rate, causing growth stock multiples to “soar.” The danger isn’t recession, but a bond market tantrum if long-end yields spike in protest.

Gold: A politically unified Fed that clearly prioritizes economic growth over inflation targeting is textbook bullish for hard assets. As the market hedges against the risk that the new government repeats the over-easing policy mistakes of the 1970s, gold should outperform Treasuries.

Bitcoin: Under normal circumstances, Bitcoin would be the purest play on the “regime change” trade. However, since the October 10 shock, Bitcoin has exhibited severe downside skew, weak macro rebound momentum, and collapses on any bad news—mainly due to mounting concerns about the “four-year cycle” and an identity crisis for Bitcoin itself. I believe that by 2026, Hassett’s monetary policy and Trump’s deregulation agenda will overcome the currently dominant self-fulfilling bearish sentiment.

Technical note: The “Tealbook”

The Tealbook is the official economic forecast produced by Fed staff, and serves as the statistical baseline for all FOMC discussions. This report is produced by the Division of Research and Statistics, led by Director Tevlin and staffed by over 400 economists. Tevlin, like most staff, is a Keynesian, and the Fed’s main model (FRB/US) explicitly uses New Keynesian assumptions.

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