The race to lead the Federal Reserve just got a lot more interesting. Kevin Hassett, currently serving as Director of the National Economic Council, has become the overwhelming favorite to succeed Jerome Powell as Fed chair when Powell's term ends next May. And if you care about interest rates, inflation, or really anything related to markets, this matters quite a bit.

A Bloomberg report this week set off a chain reaction in betting markets. On Polymarket, Hassett's odds of landing the job rocketed from 25% to 57%. That puts him miles ahead of Fed Governor Christopher Waller, who sits at 26% and has been voting for rate cuts since breaking from the broader board last July. The White House is calling all this speculation, but investors aren't waiting around—they're already positioning for what a Hassett-led Fed might look like.

The Tariff Inflation Debate Gets Complicated

Here's where things get interesting from a policy perspective. Hassett has been pushing back hard against the conventional wisdom that tariffs automatically mean higher inflation. In a recent Bloomberg interview, he pointed to a San Francisco Federal Reserve paper examining a century of trade policy data, which suggested tariffs tend to have a deflationary effect, not an inflationary one.

"Wall Street has been quite wrong on their forecasts of inflation surge, which did not happen," Hassett said. "We're on track to hit 2.9% or 3% [core PCE inflation] at the end of this year." For context, PCE—Personal Consumption Expenditures Price Index—is the Fed's preferred way to measure inflation.

Hassett's argument goes like this: tariffs act as a demand-side shock that cools spending and therefore slows price growth. It's a view that aligns neatly with his broader reputation as someone who favors looser monetary policy—meaning lower interest rates.

What Wall Street Thinks Could Happen

Tiffany Wilding, an economist at Pacific Investment Management Co., describes Hassett as the candidate most aligned with the Trump administration's preferences on interest rates. "He's clearly more dovish than the consensus on the committee right now," she said.

There's also a timing wrinkle here. While Powell's term as chair doesn't expire until May 2026, Trump could potentially install Hassett sooner—as early as January 2026—through the seat currently held by Steve Miran, whose term is expiring.

But even if Hassett gets the job, he can't just snap his fingers and cut rates. "The committee is a democratic process," Wilding explained. "He will have to have some intellectual heft in terms of convincing the others on the committee."

Wilding also noted that Powell might not actually leave the Fed board after stepping down as chair in May—he could stick around as a governor. And she raised another concern: if the Fed pushes rates too low, too fast, it could damage long-term credibility and steepen the yield curve as investors demand higher yields on long-dated Treasuries to compensate for inflation risk.

Currency and Bond Market Implications

Matthew Ryan, head of market strategy at Ebury, thinks the Hassett news could accelerate the dollar's decline. "Hassett is widely regarded as the most dovish candidate currently in the running… having previously voiced a preference for a much lower fed funds rate," Ryan said. The dollar's move has been "relatively contained so far," but he expects that could change as Powell's exit date approaches.

David Morrison, senior market analyst at Trade Nation, added that Hassett's dovish stance could support further monetary easing—which might make bond investors nervous about inflation coming back to life.

The SPDR Gold Shares (GLD) has been climbing for four straight months, which tells you something about how markets are thinking about all this uncertainty.

Bottom line: we're still over a year away from any actual change at the Fed, but the market is already gaming out what a Hassett chairmanship might mean for rates, inflation expectations, and asset prices. Whether his unconventional views on tariffs and inflation prove prescient or problematic will depend largely on whether he can build consensus among his fellow Fed officials—and whether the data cooperates.