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Traders are increasingly betting on US interest rate cuts following Jay Powell’s departure from the Federal Reserve next year, as the central bank chief faces criticism from Donald Trump for not moving quickly enough to lower borrowing costs.
Markets are expecting at least five quarter-point cuts by the end of next year, according to futures pricing, compared to four a month ago. This change is partly due to rate-setters revising their view on the inflationary impact of tariffs. Analysts also believe it reflects the president’s continuous criticism of Powell as “Mr Too Late,” which has raised expectations that a more dovish successor will be appointed.
Matthew Raskin, head of US rates research at Deutsche Bank, wrote in a recent note to clients, “The most significant shift over the past month is in the cuts expected for the middle of next year, as the market increasingly anticipates ongoing easing once the next Fed chair is in place.”
Trump revealed on Truth Social on Wednesday that he has narrowed down his search for the next Fed chair to “three or four people.” He stated, “Fortunately, [Powell] will be leaving soon, because I believe he’s doing a terrible job.”
Treasury Secretary Scott Bessent and Kevin Warsh, a former Fed governor during the 2008 financial crisis, are considered top contenders for the position. Fed Governor Christopher Waller, who recently endorsed a rate cut as early as July, is also being considered.
“The prevailing market sentiment is that whoever replaces Powell will be more dovish. It doesn’t mean they will ignore economic realities, but they may be more open to rate cuts,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.
While candidates like Warsh have typically been more hawkish than dovish, Lyngen believes this could change given the current circumstances.
He explained, “Trump has been highly critical of Powell. The candidates under consideration are currently proving themselves for the job. It’s not right to judge their future performance based on past actions in this case.”
There has been speculation in recent months that the Fed may appoint a “shadow chair” before Powell’s term ends, signaling a more dovish stance on rates. The White House stated that a decision on Powell’s replacement is not imminent.
Comments from Fed officials have also fueled expectations of quicker rate cuts. Governor Michelle Bowman, along with Waller, expressed support for rate cuts in July due to lower-than-expected inflation.
The two- and five-year Treasury yields, which are sensitive to rate expectations, reached two-month lows this week as investors priced in the possibility of more rate cuts in the medium-term.
However, Powell has resisted the idea of a July cut and has not responded to Trump’s repeated demands, mainly due to inflation concerns. During a Congressional speech on Tuesday, Powell stated that rate cuts were not on the agenda until autumn, as the central bank awaited the impact of Trump’s tariffs on prices in June and July.
Consumer price inflation slightly increased in May to 2.4 percent, although the rise was lower than economists had predicted.