This week's Federal Reserve decision "script": Decision to cut interest rates, Powell's "hawkish speech," Hasset and Bessent's "dovish hedge"?

This week's market expectations for the Federal Reserve's interest rate meeting are forming a clear "script."

On Monday, according to an analysis by Academy Securities strategist Peter Tchir, the market is pricing in a 95% probability of a rate cut in December, but Powell's hawkish statements may no longer be significant— as the soon-to-be "lame duck" Federal Reserve Chairman, his comments are losing influence over policy after the New Year.

Nomura stated that if the market "honestly" reacts to the "hawkish rate cut," it would be a liquidity reversal: bonds and stocks would weaken due to profit-taking, the dollar would strengthen, and U.S. tech and growth stocks would face valuation pressure. If market performance is based on the "Hassett trade," the U.S. Treasury yield curve would steepen, global economic recovery expectations would warm, cyclical stocks would perform well, and the dollar would come under pressure again.

It is noteworthy that the market may be underestimating the degree of dovish coordination between the Treasury, the Federal Reserve, and the White House in the future, as well as the "out-of-the-box" policy tools that may be adopted to achieve the "3-3-3 target" (3% economic growth, 3% short-term yields, and 10-year Treasury yields maintained in the 3% range).

As Trump is about to announce the new Federal Reserve Chairman candidate, National Economic Council Director Kevin Hassett has become the strongest candidate. Treasury Secretary Mnuchin not only needs to find a suitable Federal Reserve leader for Trump but also ensure that the new chairman can quickly push for rate cuts; otherwise, his own position may be at risk. Trump has made it clear that Mnuchin's fate is closely tied to the direction of Federal Reserve policy.

This personnel change and the expected policy coordination behind it are reshaping the market's judgment on the monetary policy path for 2025. Investors need to reassess the traditional framework of Federal Reserve independence and the unprecedented coordination between fiscal and monetary policy that may bring market impacts.

Market Consensus and Powell's "Lame Duck" Dilemma

Peter Tchir pointed out that if we summarize this week's Federal Reserve meeting in the simplest terms, it would be: the market is pricing in a 95% probability of a rate cut, and the Federal Reserve will not disappoint the market. But the key is that Powell, as the soon-to-be outgoing chairman, will have significantly less weight in his hawkish remarks.

This contrasts sharply with previous Federal Reserve decision days. Typically, the chairman's press conference is the focus of market attention, and hints about future policy paths often trigger significant market volatility. However, in the current situation, investors are more concerned about who will succeed Powell and what policy shifts the new chairman will bring.

Tchir believes that the current market pricing has not fully reflected two key factors: first, the high level of coordination that will emerge between the Treasury, the Federal Reserve, and the White House; second, the unconventional tools that may be adopted to achieve policy goals, including quantitative easing, twist operations, and even yield curve control.

When "Hawkish Rate Cuts" Meet the "Hassett Trade," Two Major Market Reactions May Occur

Naka Matsuzawa, a senior analyst at Nomura Securities, has warned the market: while the market is eagerly anticipating the Federal Reserve's rate cut, this could be a "hawkish rate cut" full of trapsMatsuzawa's core argument directly points to the contradictory mindset of the current market. He believes that the FOMC is very likely to implement a hawkish rate cut—meaning that while cutting rates, it will raise the threshold for further cuts in the future to appease the hawkish members within the committee. If the market reacts "honestly" to this, it would be a liquidity reversal: bonds and stocks would weaken due to profit-taking, while the dollar would strengthen. However, U.S. tech stocks and growth stocks are currently mainly driven by liquidity, and once the expectations for rate cuts fall through or are repriced, these sectors will face significant valuation pressure.

But this is not the only scenario. If the market ignores the Fed's hawkish signals and continues to celebrate, the driving force behind it can only be the so-called "Hassett trade." This trade is based on bets for a more accommodative policy from the new Fed chair, reflation, and a decline in confidence in the dollar. In this scenario, the yield curve will steepen, global economic recovery expectations will warm up, cyclical stocks will perform well, and the dollar will come under pressure again.

Bencet's Dual Pressure and Coordinating Role

Treasury Secretary Bencet is facing unprecedented pressure. Trump has made it clear that Bencet's performance will be directly linked to Fed policy. In a speech last month, Trump even joked, "The only thing Bencet has messed up is the Fed. If you can't fix it quickly, I'll fire you."

This statement is not without basis. In August of this year, Trump harshly criticized his first-term Treasury Secretary Steven Mnuchin on social media, claiming that Mnuchin's recommendation of Powell as Fed chair was a "blunder" that caused "incalculable" damage. This precedent made Bencet acutely aware that the choice of Fed personnel will directly impact his political future.

According to a recent report by The New York Times, Bencet emphasized the limitations of the Fed chair's powers at last Wednesday's New York Times DealBook conference. He stated, "The Fed chair has the ability to push and initiate discussions, but ultimately, he or she only has one vote." This statement serves to cool market expectations and suggests that future policies will require close cooperation between the Treasury and the Fed.

Traditionally, the Treasury Secretary and the Fed chair have dinner together weekly to discuss economic conditions. However, Bencet has shown a willingness to break from tradition. Earlier this year, he hinted that Fed officials make decisions based on political considerations and accused them of suffering from "tariff confusion syndrome." On Wednesday, he cited economic weakness in areas such as real estate, advocating for a rate cut by the Fed.

Hassett's Loyalty and Reform Commitment

Trump stated on Tuesday that the new Fed chair candidate may be announced "early next year," with Hassett being the strongest candidate. Mark Spindel, Chief Investment Officer of Potomac River Capital, commented that Hassett has a high degree of loyalty and possesses a unique ability to translate—both converting Trump-style expressions into rigorous and coherent economics and vice versa.

Hassett himself is also actively demonstrating his ability to advocate for rate cuts. According to CBS News, he stated on Sunday, "I believe the American people can expect President Trump to choose someone who can help them get cheaper auto loans and lower interest rate mortgages."This is the market's reaction to the rumors about me. "He attributed the decline in long-term Treasury yields to the news of himself becoming a popular candidate."

But Spindel also pointed out potential risks: "No one can afford a collapse in the bond market. This has always been present in Bessent's policy thinking." If Hassett pushes for interest rate cuts too aggressively, it could raise doubts among Wall Street investors about the Federal Reserve's commitment to controlling inflation, leading to a sell-off in Treasuries and rising borrowing costs, which is particularly dangerous in the context of the government issuing a large amount of debt.

Bessent also called for a comprehensive reform of the Federal Reserve, accusing its staff of "overstepping their bounds." On Wednesday, he directed his criticism at the 12 regional reserve bank presidents, complaining that some officials do not come from the regions they represent, and suggested that future regional Federal Reserve chairs must reside in their districts for at least three years to be eligible for the position. It is expected that Hassett or any nominated candidate, once in office, will push for a thorough reform of the institution.