FED Chair Succession Storm: Markets Betting on Powell's Successor?

By ariachiang

2025-12-18

Federal Reserve Chair Jerome Powell’s term is set to expire in May 2026, and market speculation over his successor has intensified, becoming a key catalyst for heightened financial market volatility. As of December 17, 2025, notable shifts have emerged along the U.S. Treasury yield curve. The 10-year Treasury yield fell 8 basis points from the previous week to 4.22%, marking its lowest level in nearly three months, while the 2-year yield rose 5 basis points to 3.95%, reflecting rising short-term rate expectations and a further deepening of yield curve inversion. Meanwhile, the U.S. Dollar Index (DXY) declined by 1.2% since December 16, recording its largest weekly drop of the year, as investors grew increasingly uneasy about the future direction of monetary policy. In equity markets, the S&P 500 briefly fell as much as 0.8% intraday on December 17, with technology stocks leading losses of more than 1.5%, underscoring the market’s sensitivity to uncertainty surrounding the policy stance of Powell’s potential successor. Overall market volatility has increased by approximately 25% compared with the same period last month.

The intensifying succession debate largely stems from public statements following the inauguration of the Trump administration. On December 16, President-elect Donald Trump hinted via social media that he may nominate a more “hawkish” candidate to replace Powell, triggering market anxiety. Potential candidates include former Fed Governor Judy Shelton and Treasury Secretary nominee Scott Bessent, both of whom advocate reducing the Federal Reserve’s independence and accelerating monetary tightening. These expectations have exacerbated selling pressure in the bond market, widening the yield curve inversion to 45 basis points, the largest since November 2025.

Economic data have further deepened market divisions. The latest figures show U.S. CPI inflation rising 2.7% year over year in November, up 0.3 percentage points from the prior month. While still above the Fed’s 2% inflation target, the reading came in below some market expectations, lending support to hawkish arguments. At the same time, the unemployment rate remained at 4.1%, while retail sales released on December 16 declined 0.1% month over month, signaling a slowdown in consumer demand. The interaction between political intervention and mixed economic indicators has amplified uncertainty surrounding the future interest rate path.

Overall, the Fed chair succession issue has temporarily overtaken traditional macroeconomic data as the dominant driver of market sentiment. In the near term, U.S. equities and the dollar are likely to remain volatile, with the VIX expected to stay above 20. Over the medium term, should Trump successfully advance a hawkish nominee, the federal funds rate may remain in the 5.25% to 5.50% range through the first half of 2026, with an estimated 40% probability of a 25-basis-point rate hike. Conversely, if congressional resistance intensifies, the probability of Powell’s reappointment could rise to 35%, potentially providing support for a rebound in the bond market. Investors are advised to closely monitor the December 18 FOMC meeting minutes and developments in key personnel appointments, while diversifying into gold and short-term U.S. Treasuries as hedges against volatility. Looking ahead to 2026, the outcome of the Fed leadership transition is expected to have a profound impact on global capital flows, with Taiwan’s equity market and the New Taiwan dollar unlikely to remain unaffected.

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