To The Moon

$S&P 500(.SPX)$

The Federal Reserve is once again at the center of political and market attention. As quantitative tightening (QT) approaches its scheduled conclusion and former President Donald Trump signals that his choice for the next Fed Chair will be announced soon, investors face a rare moment of simultaneous monetary and political uncertainty. Prediction markets have swiftly recalibrated expectations: Kevin Hassett now carries a roughly 64% probability of receiving the nomination, Fed Governor Christopher Waller sits at 12%, and former Governor Kevin Warsh holds 11%, with the rest distributed among lower-visibility candidates.

For markets, the implications extend far beyond the identity of the central bank’s next leader. The end of QT alters liquidity dynamics, while leadership changes introduce uncertainty about the trajectory of interest rates, balance-sheet policy, and the independence of the Federal Reserve. With 2026 increasingly seen as the year when meaningful rate cuts may return, the question becomes: Will a new chair accelerate the pivot—or reinforce a higher-for-longer stance?

This article examines the political backdrop, policy positions of the leading candidates, the potential impact on inflation management, and the broader market implications as investors weigh whether these developments are bullish or bearish heading into 2026.

A Rare Convergence: QT Ends Just as a Political Shift Begins

The Federal Reserve’s decision to end QT marks a significant milestone in the post-pandemic monetary unwinding process. After years of balance-sheet runoff aimed at reducing liquidity and tightening financial conditions, the shift signals the Fed’s belief that monetary normalization is reaching its terminal point. This alone carries profound implications for Treasury yields, bank reserves, and broader financial stability.

Yet this transition arrives at the same moment the White House prepares to reshape the Fed’s top leadership. Historically, QT changes and leadership transitions do not overlap. Investors are now forced to evaluate these structural shifts at once, creating an unusual analytical challenge: even if policy direction remains consistent, communication style and reaction function could change dramatically under new leadership.

Markets tend to dislike uncertainty—yet this moment brings both uncertainty and opportunity. If QT ends and the next chair is perceived as dovish, the bond market could pivot rapidly. If QT ends but the new chair is more hawkish or emphasizes inflation vigilance, the anticipated policy easing cycle could be pushed further out.

The era of predictable Federal Reserve leadership is ending. The new one may look much more political.

Evaluating the Candidates: Hassett, Waller, and Warsh

Kevin Hassett: The Market’s Current Favorite

Kevin Hassett’s sharp rise in prediction markets reflects both political alignment and market interpretation. As a former Chair of the Council of Economic Advisers under Trump, Hassett is generally seen as a pro-growth economist who prioritizes full employment and economic momentum. His academic background is rooted in supply-side theory, and his public commentary often emphasizes maximizing output potential.

Hassett has historically supported moderately lower rates when economic indicators permit, and he has critiqued overly restrictive Fed policy at times. For Wall Street, this makes him the closest approximation of a politically sympathetic dove.

Yet the key question is not whether Hassett is fundamentally dovish, but whether he would become more cautious once placed in leadership. Many Fed Chairs moderate significantly after stepping into the role—Powell, for instance, became more hawkish than markets anticipated during much of his tenure.

If Hassett is nominated and confirmed, markets should expect:

• A more growth-sensitive reaction function

• Quicker willingness to cut rates if inflation continues trending downward

• Potential openness to altering the balance-sheet normalization framework

• Greater alignment with the administration’s political priorities

Investors betting on a 2026 easing cycle would interpret a Hassett-led Fed as broadly bullish for rates and risk assets.

Christopher Waller: Continuity and Institutional Stability

Christopher Waller, currently serving as a Federal Reserve Governor, is seen as the establishment candidate. His approach to policy has been pragmatic, often balancing inflation risks with employment outcomes. Waller is not a doctrinaire hawk or dove; instead, he aligns closely with data-driven decision-making and often mirrors Powell’s communication style.

The low probability assigned to his nomination in prediction markets is political, not intellectual. Waller is respected across the economics community but is not considered an ideological match for the incoming administration.

Under Waller’s leadership, investors could expect:

• Slower, more data-dependent rate cuts

• Strong institutional continuity

• Emphasis on maintaining credibility after years of inflation volatility

• A cautious stance on forward guidance

For 2026, a Waller-led Fed likely supports gradual, predictable cuts—less market excitement, more policy stability.

Kevin Warsh: The True Hawk in the Race

Kevin Warsh’s views are well-known to Fed historians. He has consistently advocated for tighter monetary policy, warned early about inflation risks, and criticized extended periods of low interest rates. Markets remember that he was one of the earliest critics of quantitative easing and has long been concerned about asset bubbles forming under accommodative policy.

While Warsh is polished, articulate, and seasoned, his appointment would likely be interpreted as a bearish signal for early 2026 rate cuts. Under his leadership, investors should expect:

• Slower easing cycles

• Greater emphasis on inflation credibility

• Potential for higher real rates for longer

• Renewed scrutiny of asset valuations

If Warsh is selected, markets may brace for a more hawkish stance even in the post-inflation era.

Political Dynamics: How Much Influence Will Trump Exert?

Powell’s Example: Independence Tested but Not Broken

During Powell’s tenure, political pressure reached levels unseen in decades. Despite frequent criticisms from the White House, Powell maintained relative independence, refusing to cut rates aggressively during the late 2010s. This created a perception that the Federal Reserve could withstand political influence even under intense public pressure.

But Powell was already established when the criticism came. The upcoming scenario is different: a newly appointed chair may face structural incentives to align more closely with the administration’s preferences.

Could the New Chair Be More Aligned?

The new chair’s independence may depend on:

1. Who is selected: A politically aligned economist may naturally interpret data in directions favorable to the administration.

2. Economic conditions entering 2025–2026: If the economy softens, political pressure for rate cuts will intensify.

3. Balance-sheet policy: Ending QT allows more flexibility, but also increases political scrutiny over liquidity injections.

4. Fiscal-monetary coordination: With large deficits, Treasury funding needs may influence the debate around rates.

In short, a new chair may align more closely with the White House—not through coercion, but through shared worldview.

Inflation Outlook: Is 2026 the Window for Deep Cuts?

Disinflation Trend Aligns with Political Incentives

Inflation has been trending lower, and long-term expectations remain anchored. If this trend continues into 2025, the new Fed chair will inherit a landscape where:

• Core PCE is approaching target

• Wage growth is moderating

• Supply chains have normalized

• Energy volatility is declining

Under such conditions, significant rate cuts in 2026 become mathematically reasonable.

The Risk: Inflation Reaccelerates Under a More Dovish Chair

Markets also face a scenario where:

• Fiscal expansion continues

• Labor markets remain tight

• Housing shortages keep shelter inflation elevated

If the new chair moves too quickly toward easing, inflation may re-ignite. This is the core market concern, especially under a politically aligned leadership.

The question becomes: Will the new chair prioritize inflation discipline—or economic growth?

Balance Sheet Policy: Ending QT Changes the Liquidity Narrative

QT—quantitative tightening—has been a slow, deliberate withdrawal of liquidity from the financial system. Its conclusion has four major implications:

1. Bank Reserves Increase Ending QT reduces downward pressure on reserves, stabilizing the banking system heading into 2026.

2. Treasury Market Relief With the Fed no longer shrinking its holdings, Treasury auctions face fewer liquidity strains.

3. Risk Assets Benefit Liquidity-sensitive markets—equities, crypto, and credit—tend to react positively when QT ends.

4. Room to Cut Rates Expands A static balance sheet gives policymakers more freedom to use the interest-rate tool without overwhelming liquidity impacts.

Regardless of who becomes Fed Chair, the end of QT is fundamentally bullish for liquidity conditions.

But the degree of bullishness depends almost entirely on who controls the policy lever next.

What Does This Mean for the Stock Market?

If Hassett Becomes Chair: Risk-On Rally

Expect:

• Growth stocks outperform

• Small caps surge

• Long-duration assets benefit

• Treasury yields fall more quickly

• Corporate credit spreads tighten

This scenario is broadly bullish for the S&P 500 and Nasdaq heading into 2026.

If Waller Becomes Chair: Moderate, Predictable Performance

Expect:

• Gradual easing

• Low volatility

• Strong institutional continuity

This is the “Goldilocks” scenario: predictable, but not exhilarating.

If Warsh Becomes Chair: Cautious Markets Ahead

Expect:

• Persistent higher real rates

• Value and defensives outperform

• Tech multiples restricted

• Bond market reacts cautiously

This scenario is the most bearish for early 2026 rate cuts.

Could the New Chair Become Another Powell—Independent and Unpredictable?

Jerome Powell’s leadership defied early expectations. Initially seen as a flexible, market-friendly moderate, he became one of the most hawkish Fed Chairs in recent memory, leading the most aggressive tightening cycle since the 1980s. His transformation highlights a crucial pattern:

The office changes the person, not the other way around.

Historical precedents show that:

• Bernanke became more cautious after the financial crisis

• Yellen became more hawkish as labor markets tightened

• Volcker remained independent despite political pressure

If Hassett or Warsh steps into the role, their academic positions may not reflect their leadership instincts. The institutional weight of the Fed often exerts a moderating effect.

Thus, predictions about how aligned the new chair will be with Trump may prove overly simplistic. Political closeness does not guarantee policy obedience.

How Investors Should Position for 2026

1. Rates Market

Expect a downward drift as QT ends, with steeper declines under a Hassett-led regime.

2. Equities

The more dovish the chair, the stronger the upside risk to growth stocks.

3. Bonds

If Warsh becomes chair, long-duration bonds may face renewed pressure.

4. Dollar

A dovish scenario weakens the dollar; a Warsh appointment strengthens it.

5. Commodities

Gold thrives under political uncertainty and dovish leadership. Oil reacts more to geopolitical and supply dynamics.

Bullish or Bearish? The Final Verdict

Bullish Scenario (Hassett or dovish chair): Markets rally sharply. Rate cuts begin in late 2025 or early 2026. Liquidity flush returns. The S&P 500 could see valuation expansion.

Neutral Scenario (Waller): Predictable path, modest easing, low volatility. Strong environment for long-term investors.

Bearish Scenario (Warsh): Easing delayed, higher-for-longer persists, market repricing occurs. Real rates stay elevated.

Ultimately, whether this transition is bullish or bearish depends almost entirely on the identity of the new chair.

Conclusion: A Pivotal Moment for Monetary Leadership

The convergence of the end of QT and the appointment of a new Fed Chair marks a rare inflection point in U.S. monetary policy. Markets must simultaneously digest structural liquidity changes and prepare for potentially significant shifts in the Federal Reserve’s reaction function.

A Hassett nomination would inject optimism into markets expecting an accelerated easing cycle. A Waller appointment would reinforce institutional stability and continuity. A Warsh appointment would signal a return to stricter inflation vigilance and a more conservative policy stance.

As 2026 approaches, rate cuts are increasingly seen as likely—but the pace, magnitude, and market impact hinge on who ultimately takes the helm of the world’s most influential central bank.

For now, QT’s conclusion marks the end of one era. The identity of the next Fed Chair will determine how the next one begins.