Abstract: The policy framework will shift from the technocratic caution of the Powell era to a more explicit focus on lowering borrowing costs and serving the president's economic agenda.
Original Title: 2026: The Year of the Fed's Regime Change
Original Author: @krugermacro
Translator: Peggy, BlockBeats
Editor's Note: The Federal Reserve in 2026 may experience a true "regime change." If Hassett becomes chairman, monetary policy may shift from the cautious and steady approach of the Powell era to a more aggressive rate-cutting path and a "growth-first" framework. Short-term rates, long-term expectations, and cross-asset pricing will all be forced to reevaluate. This article outlines the key logic and market impacts of this potential turning point; the main trading theme for next year is not just rate cuts, but a completely new Federal Reserve.
The following is the original text:
The Federal Reserve as we know it will come to an end in 2026.
The most important driver of asset returns next year will be the "new Federal Reserve"—more specifically, the policy paradigm shift brought about by the new chairman appointed by Trump.
Kevin Hassett has become the most likely nominee for Federal Reserve chairman by Trump (as of December 2, Kalshi prediction market gives a probability of 70%). Hassett, currently the director of the National Economic Council, is a supply-side economist and a long-time loyal supporter of Trump. He advocates for a "growth-first" philosophy, arguing that since the war against inflation has largely been won, maintaining high real interest rates is no longer economically rational but rather a political stubbornness. If he takes office, it will signify a decisive institutional shift: the Federal Reserve will move from the technocratic caution of the Powell era to a policy framework that more explicitly aims to lower borrowing costs and serve the president's economic agenda.
To understand what kind of policy regime he will establish, one can look directly at his public statements this year regarding interest rates and the Federal Reserve:
"If the Fed does not cut rates in December, the only explanation is anti-Trump partisan bias." (November 21)
"If I were on the FOMC, I would be more likely to vote for a rate cut, while Powell would be less likely." (November 12)
"I agree with Trump: rates can be significantly lowered." (November 12)
"The expected three rate cuts are just the beginning." (October 17)
"I want the Fed to aggressively continue cutting rates." (October 2)
"The direction of the Fed's rate cuts is correct; rates should be lower." (September 18)
"Waller and Trump are right about interest rates." (June 23)
If we were to place his stance on a scale from dove to hawk (1 = most dovish, 10 = most hawkish), Hassett would likely be around 2.
If nominated, Hassett would replace Miran as a Federal Reserve governor in January, as Miran's short-term term will end then. Subsequently, in May, as Powell's term expires, he would be elevated to chairman; Powell is expected to resign from his governorship after announcing his intention, thereby creating a vacancy for Trump to nominate Warsh.
Although Warsh is currently Hassett's main competitor for the chairmanship, this article assumes he will ultimately be incorporated into the system as part of the reform force. As a former Federal Reserve governor, Warsh has been publicly "campaigning" for a platform of structural reform, explicitly calling for the reconstruction of a "new Treasury-Fed agreement" and criticizing the current Federal Reserve leadership for "submitting to the tyranny of the status quo." The key point is that Warsh believes the current AI-driven productivity surge is inherently deflationary, which means the Federal Reserve is making a policy error by maintaining tight rates.
New Power Balance
Under this framework, Trump's version of the Federal Reserve will form a dominant dovish core team and have a viable path to garner votes on most easing issues. However, this is not a guarantee, as consensus still needs to be reached, and the degree of dovishness remains uncertain.
➤ Dovish Core (4 members):
Hassett (Chair), Warsh (Governor), Waller (Governor), Bowman (Governor)
➤ Potential Supporters (6 members):
Cook (Governor), Barr (Governor), Jefferson (Governor), Kashkari (Minneapolis), Williams (New York), A. Paulson (Philadelphia)
➤ Hawks (2 members):
Hammack (Cleveland), Logan (Dallas)
However, if Powell chooses not to resign from his governorship (despite the historical low probability—former chairmen almost always resign, for example, Yellen resigned 18 days after Powell was nominated), it would be an extremely negative scenario. This would not only prevent Warsh's seat from becoming vacant but also allow Powell to become a "shadow chairman," maintaining greater appeal and influence over FOMC members outside the dovish core.
Timeline: Four Stages of Market Reaction
Based on all the above factors, the market's reaction will roughly go through four clear stages:
(December / January) Immediate optimism following Hassett's nomination. In the weeks following confirmation, risk assets will welcome a clearly positioned, dovish, and loyal new chairman.
If Powell does not announce his resignation within three weeks, a gradually rising sense of unease will emerge. Each day of delay will reactivate the tail risk of "what if he doesn't resign?"
The moment Powell announces his resignation, the market will experience a wave of joy.
As the first FOMC meeting chaired by Hassett in June 2026 approaches, market sentiment will tighten again.
Investors will closely monitor all public statements from FOMC members (they will speak frequently, providing clues about their thought processes and inclinations).
Risk: A Divided Committee
Without the "key vote" that many mistakenly believe the chairman possesses (which does not actually exist), Hassett must win debates within the FOMC to ensure majority support.
If every 50bp rate cut decision passes with a narrow margin of 7–5, it will have an erosive effect on the institution: signaling to the market that the chairman is more of a political agent than an independent economist.
In a more extreme scenario: a 6–6 tie, or 4–8 opposition to rate cuts.
That would be catastrophic.
Specific voting details will be published in the FOMC meeting minutes three weeks after each meeting, meaning the release of the minutes will become an important market volatility event.
As for what will happen after the first meeting, it remains a huge unknown.
My basic judgment is that Hassett, with solid support of 4 votes and a credible path to garner 10 votes, will be able to shape a dovish consensus and push his agenda forward.
Inference: The market cannot fully front-run the dovish tendencies of the new Federal Reserve.
Interest Rate Repricing
The "dot plot" is an illusion.
While the median rate forecast for December 2026 released in September is 3.4%, this number is the median of all participants (including non-voting hawkish members).
Based on an attribution analysis of public statements, I estimate that the true median for voting members is significantly lower, at 3.1%.
When replacing Powell and Miran with Hassett and Warsh, the picture changes further.
With Miran and Waller as the new regime proxies for "aggressive rate-cutting tendencies," the voting distribution for 2026 still shows a bimodal characteristic, but both peaks are lower:
Williams / Paulson / Barr → 3.1%
Hassett / Warsh / Waller → 2.6%
I set the anchoring point for the new leadership at 2.6% to match Miran's official forecast; however, it is worth noting that Miran has publicly stated that the "acceptable rate" should be between 2.0% and 2.5%, which means the new regime's preferences may be more dovish than reflected in the "dot plot."
The market has already reflected this change; currently (as of December 2), the pricing for the December 2026 rate is 3.02%, but it has not fully accounted for the impending regime shift. If Hassett successfully pushes the committee to lower rates further, the short end of the yield curve still has about 40 basis points of additional downside potential.
Moreover, if Hassett's assessment of "supply-side disinflation" is correct, inflation will decline faster than the market consensus, forcing the Federal Reserve to cut rates further to avoid "passive tightening" due to rising real rates.
Cross-Asset Implications
While the market's initial reaction to Hassett's nomination should be "risk-on," a more precise expression of this regime shift is reflationary steepening:
Short end: betting on aggressive rate cuts
Long end: pricing in higher nominal growth (with potential inflation risks)
1. Rates
Hassett's goal is to combine "recessionary aggressive rate cuts" with "3%+ growth during prosperous periods."
If this policy works: the 2-year yield will drop significantly to preemptively account for the rate-cutting path; the 10-year yield may remain elevated due to stronger structural growth and higher inflation premiums.
In other words: a sharp drop in the short end, resilience in the long end, and a steepening curve.
2. Equities
In Hassett's view, the current policy stance is suppressing the AI-driven productivity boom.
Once he takes office: he will lower the real discount rate, driving growth stocks into a valuation-expanding "melt-up" rally.
The biggest risk is not an economic recession, but if long-end yields surge, it could trigger a "rebellion" in the bond market.
3. Gold
When the Federal Reserve is politically aligned with the government and clearly prioritizes growth over inflation targets, this is the classic bullish logic for hard assets.
Therefore: gold should outperform U.S. Treasuries, as the market will hedge against the new regime potentially repeating the "overly aggressive rate cuts and policy mistakes" of the 1970s.
4. Bitcoin
Under normal circumstances, Bitcoin would be the purest expression of this "regime change" trade.
However, since the 10/10 event, Bitcoin has shown: a clear downside skew; weak performance during macro-positive conditions; catastrophic declines during negative conditions; fears of a "four-year cycle top"; and a narrative identity crisis.
I believe that by 2026, Hassett's monetary policy and Trump's deregulation agenda will be sufficient to override this self-reinforcing pessimism.
Technical Note: About the Tealbook (Federal Reserve's Internal Forecast)
The Tealbook is the official economic forecast of the Federal Reserve's research department and serves as a statistical benchmark for FOMC debates.
It is managed by the Division of Research & Statistics, which has over 400 economists and is led by Director Tevlin.
Tevlin, like most team members, is a Keynesian, and the Federal Reserve's core model, FRB/US, is also explicitly a New Keynesian framework.
Hassett could vote on the board to appoint a supply-side economist to lead this department.
Replacing Keynesian modelers who "believe growth will bring inflation" with supply-side modelers who "believe AI prosperity brings deflationary pressure" would significantly change the forecasts.
For example: if the model predicts inflation will drop from 2.5% to 1.8% due to productivity improvements,
those FOMC members who were originally less dovish would also be more willing to support aggressive rate cuts.
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