2026: The Year of the Fed's Regime Change
The End of the Fed As We Know It
The Federal Reserve as we know it ends in 2026.
The most important driver of asset returns next year will be the new Federal Reserve, specifically the regime shift brought by Trump’s new Fed Chair.
Hassett has emerged as Trump’s top pick to lead the Federal Reserve (70% odds on Kalshi as of Dec 2). Currently serving as Director of the National Economic Council, he is a supply-side economist and long-time loyalist who champions a “growth-first” philosophy, arguing that with the inflation war largely won, maintaining high real rates is an act of political obstinacy rather than economic prudence. His potential ascension signals a decisive regime shift: moving the Fed away from the technocratic caution of the Powell era toward a mandate that explicitly prioritizes lower borrowing costs to fuel the President’s economic agenda.
To understand the policy regime he would install, let’s evaluate exactly what he has said regarding rates and the Fed this year:
“The only way to explain a Fed decision not to cut in December would be due to anti-Trump partisanship.” (Nov 21).
“If I’m at the FOMC, I’m more likely to move to cut rates, while Powell is less likely” (Nov 12).
“I agree with Trump that rates can be a lot lower” (Nov 12).
“Expected three rate cuts are a start” (Oct 17).
“I want the Fed to keep cutting rates aggressively” (Oct 2).
“Fed cut is in the right direction of much lower rates” (Sep 18).
“Waller and Trump are right about interest rates” (Jun 23).
On a dovish-to-hawkish scale of 1–10 (1 = most dovish, 10 = most hawkish), Hassett is a 2.
If nominated, Hassett would replace Miran as Fed Governor in January, when Miran’s short term expires. Then in May, Hassett would be elevated to Chair when Powell’s term ends. Powell would then resign his remaining Governor seat after announcing his intent months in advance, per historical precedent, paving the way for Trump to nominate Warsh to fill it.
Although Warsh is currently Hassett’s primary competitor for the Chair nomination, my thesis assumes he is brought into the fold as a force of change. A former Fed Governor, Warsh has been “campaigning” on a platform of structural overhaul, explicitly calling for a “new Treasury-Fed Accord” and attacking the Fed’s leadership for succumbing to the “tyranny of the status quo”. Critically, Warsh argues that the current AI-driven productivity boom is inherently disinflationary, meaning the Fed is making a policy error by keeping rates restrictive.
The New Balance of Power
This setup would give Trump’s Fed a dominant dovish core and a credible path to sway votes on most easing calls, although this is not guaranteed, nor would be the extent of the dovish tilt, as consensus still needs to be reached.
➤ The Dovish Core (4): Hassett (Chair), Warsh (Gov), Waller (Gov), Bowman (Gov).
➤ The “Swayables” (6): Cook (Gov), Barr (Gov), Jefferson (Gov), Kashkari (Minneapolis), Williams (NY), A. Paulson (Philly).
➤ The Hawks (2): Hammack (Cleveland), Logan (Dallas).
However, if Powell were not to resign his seat (extremely high odds he does; outgoing Chairs have always resigned, with Yellen for example resigning 18 days after Powell’s nomination) that would likely be extremely bearish. Such a move would not only block the vacancy needed for Warsh, but would leave Powell as a “Shadow Chair,” a rival center of gravity likely to command more loyalty from FOMC members outside the Dovish Core.
The Timeline: Four Phases of Market Reaction
Given all of the above, the market reaction should play out in four distinct phases:
Immediate bullishness on Hassett’s nomination (December/January) and in the weeks after confirmation, as risk assets should love a vocal dovish loyalist in the Chair seat.
Growing unease if Powell has not announced his Board resignation within three weeks, since every day without an announcement would then revive the “what if he hangs on?” tail risk.
A wave of euphoria the moment Powell announces his resignation.
Renewed jitters heading into the first Hassett-led FOMC meeting in June 2026, with the market hanging on every word of FOMC voting members (they speak regularly, giving glimpses into their views and thought processes).
The Risk: A Fractured Committee
Without the “tie-breaker” vote many assume the Chair has (he doesn’t), Hassett must win the debate at the FOMC to secure a true majority. A 7-5 split on every 50 bp move would be institutionally corrosive, signaling to markets that the Chair is acting as a political operative rather than an impartial economist. At the extreme, a 6-6 tie or 4-8 vote against cuts would be a catastrophe. The exact vote counts would show up in the FOMC Minutes three weeks after every FOMC, turning those releases into major market-moving events.
What happens after that first meeting is the great unknown. My base case is Hassett, with 4 firm votes and a credible path to 10, would forge a dovish consensus and execute his agenda.
Corollary: the market will not be able to front-run in full the new Fed’s dovish stance.
Rates repricing
The Dot Plot is a mirage. While the headline September projection for December 2026 sits at 3.4%, this figure represents the median of all participants, including the hawkish non-voters. By denonymizing the dots based on public statements, I estimate the voters’ median is significantly lower at 3.1%.
The picture shifts further when I substitute Hassett and Warsh for Powell and Miran. Using Miran and Waller as proxies for the new regime’s aggressive cut stance, the 2026 voting distribution remains bimodal, but the modes shift lower: Williams/Paulson/Barr at 3.1%, and Hassett/Warsh/Waller at 2.6%. I anchor the new leadership at 2.6% to match Miran’s official projection, though I note his stated preference for an “appropriate rate” of 2.0%–2.5% implies the new regime’s bias is even lower than their dots suggest.
The market partially recognizes this, pricing December 2026 at 3.02% (as of Dec 2), but it has yet to fully price the magnitude of the regime change. If Hassett were to succeed in steering the board lower, the short end of the curve would have another 40bps of repricing to do. Furthermore, if Hassett proves correct about Supply-Side Disinflation, inflation will fall faster than the consensus expects, driving a push for even deeper cuts to prevent passive tightening.
Cross-Asset Implications
While the knee-jerk reaction to a Hassett nomination should be “risk-on”, the precise expression of this regime change is a Reflationary Steepening, betting on aggressive ease at the front end, but pricing in higher nominal growth (and inflation risk) at the long end.
Rates: Hassett wants the aggressive cuts of a recessionary Fed combined with the 3%+ growth of a boom time. If he succeeds, 2-Year yields should collapse to price in the cuts, while 10-Year yields likely remain elevated due to higher structural growth and lingering inflation premiums.
Equities: Hassett views the current policy stance as actively suppressing the AI-driven productivity boom. He would crush the real discount rate, fueling a multiple-expansion “melt-up” in growth stocks. The danger is not a recession, but a bond market revolt, if long-end yields spike in protest.
Gold: A politically aligned Fed that explicitly prioritizes growth over inflation targeting is the textbook bull case for hard assets. Gold should outperform Treasuries as the market hedges the risk that the new regime creates a 1970s-style policy mistake by cutting too deep.
Bitcoin: Under normal circumstances, bitcoin would be the purest expression of the Regime Change trade. However, since the 10/10 shock, it has developed a brutal downside skew, fading macro rallies while crashing catastrophically on bad news, amidst “4-year cycle” top fears and an identity crisis. My view is that Hassett’s monetary policy and Trump’s deregulation agenda would override the dominant self-fulfilling bearish psychology, in 2026.
Technical note: The “Tealbook”
The Tealbook is the Fed staff’s official economic forecast and the statistical baseline for all FOMC debates. It is produced by the Division of Research & Statistics, an army of over 400 economists led by Director Tevlin. Tevlin, like the majority of her staff, is Keynesian, and the Fed’s workhorse model (FRB/US) is explicitly New Keynesian.
Hassett could install a Supply-Sider to run the division (via a Board vote). Replacing a traditional Keynesian modeler (who sees growth as inflationary) with a Supply-Sider (who models the AI boom as disinflationary) would shift forecasts. If for example the staff model predicts 2.5% inflation falling to 1.8% due to productivity, the less dovish FOMC members could feel more comfortable voting for aggressive cuts.
To wrap this up, here is a video of Hassett outlining his supply-side strategy (deregulation, energy production) to generate non-inflationary growth, just for you to put a face to the name.
Very nice article, tanks for the read!