Uncertainty over next Fed chair weighs on US stocks and bonds

Recent shifts in expectations surrounding the next chair of the US Federal Reserve have unsettled financial markets in the US, leading to modest but broad-based declines in equities and bonds. The volatility followed comments by US President Donald Trump that appeared to downplay the likelihood of his economic adviser, Kevin Hassett, becoming the next Fed chair.

Speaking at a White House event on Jan. 16, Trump praised Hassett's work as director of the National Economic Council but suggested he might prefer Hassett to remain in his current role rather than move to the Federal Reserve. This marked a change in tone, as Hassett had long been viewed as a leading contender to succeed Jerome Powell and has repeatedly called for aggressive interest rate cuts.

Markets reacted cautiously. The S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and Nasdaq 100 all posted small declines on the day, while the VIX volatility index rose and recorded a strong weekly gain. Although the Russell 2000 advanced for the week, overall sentiment across risk assets remained fragile.

Precious metals also weakened. Spot gold fell after Trump's remarks, reversing part of its earlier gains, while silver declined more sharply, reflecting shifting expectations around future monetary policy.

Meanwhile, prediction markets on Kalshi now point to Kevin Warsh as the leading candidate to replace Powell, overtaking Hassett by a wide margin. A former Fed governor, Warsh is a vocal critic of the central bank and is widely seen as hawkish, prioritizing inflation control even if it requires higher interest rates.

This leadership uncertainty comes at a sensitive time for US monetary policy. Employment data show signs of cooling, yet inflation remains above the Fed's target, leaving investors wary that any unexpected hawkish signals could quickly drive volatility higher.

As Bloomberg macro strategist Michael Ball has warned, any unexpected hawkish signals from the Fed could quickly shatter market complacency, driving volatility sharply higher. For now, investors appear to be bracing for a period of continued uncertainty as politics, policy, and economic data collide.