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Traders are increasing their bets on US interest rate cuts after Jay Powell leaves the Federal Reserve next year, as the central bank chief faces a barrage of criticism from Donald Trump for moving too slowly in lowering borrowing costs.
Markets are anticipating at least five quarter-point cuts by the end of next year, according to futures pricing, compared with four at most a month ago. The change in expectations is partly down to rate-setters tempering their view on the inflationary effects of tariffs. But analysts say it also reflects the president’s constant haranguing of Powell as “Mr Too Late”, which has fanned expectations he will appoint a more dovish successor.
“The more notable shift over the past month is in cuts priced for the middle of next year, as the market seems to increasingly anticipate ongoing easing once the next Fed chair is in place,” wrote Matthew Raskin, head of US rates research at Deutsche Bank in a recent note to clients.
Trump said in a post on Truth Social on Wednesday that he had narrowed his search for the next Fed chair to “three or four people”. He added: “I mean [Powell] goes out pretty soon, fortunately, because I think he’s terrible.”
Treasury secretary Scott Bessent and Kevin Warsh, who served as a Fed governor during the 2008 financial crisis, are widely believed to be among front runners for the job. Fed governor Christopher Waller, who this week endorsed a rate cut as soon as July, is also under consideration.
“I think that the prevailing market wisdom is that whoever replaces Powell is going to be more dovish. It doesn’t mean that they will be non-responsive to the realities of the economy, but they may be more amenable to [lowering rates],” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.
While candidates such as Warsh have historically been more hawkish than dovish, Lyngen said that might change in the current environment.
He said: “Trump has been extremely critical of Powell. The people who are under consideration are currently auditioning for the job. To look at prior performance and map it to future performance is not right in this instance.”
Expectations have mounted in recent months that the Fed may appoint a “shadow chair” in advance of the end of Powell’s term who could signal a more dovish direction on rates. The White House said a decision on Powell’s replacement was not “imminent”.
Comments from Fed policymakers have also stoked expectations of faster cuts. Governor Michelle Bowman joined Waller this week in saying she supports cutting rates as soon as July, citing 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.
But Powell has pushed back against the possibility of a July cut and has not reacted to Trump’s repeated demands, largely because of inflation risks. At a speech in Congress on Tuesday, Powell said that cuts were off the table until the autumn, as the central bank was expecting to see the effects of Trump’s tariffs on prices in June and July.
Consumer price inflation accelerated slightly in May to a rate of 2.4 per cent, though the rise was smaller than economists had predicted.
