MAN GROUP, the world's largest listed hedge fund group, has warned that the Federal Reserve may need to restart quantitative easing to suppress long-term borrowing costs if bond markets question the independence of its next chair. This alert underscores the critical impact of central bank credibility on financial markets.
As Kevin Hassett, director of the White House National Economic Council, emerges as the frontrunner to succeed Jerome Powell, concerns over Fed independence have become a major investor worry. President Trump recently stated the Fed chair selection has "narrowed to one person," referring to Hassett as a "potential Fed chair."
Kristina Hooper, chief market strategist at MAN GROUP, pointed to Britain's cautionary precedent. In 2022, traders dumped UK gilts due to lost confidence in then-Prime Minister Liz Truss's economic policies, leaving British borrowing costs persistently higher than most G7 economies - a stark reminder of how official credibility matters.
The US Treasury market already shows unusual signals. Despite expectations for another 25-basis-point Fed rate cut this week, 10-year yields have risen over 20 basis points from October lows. This inverse movement highlights market sensitivity to policy independence.
**Independence Doubts Could Force QE Return**
Hooper explicitly stated in a LinkedIn post that if markets perceive the new Fed chair as "lacking independence" and focused on lowering long-term rates, "I believe that person would have to resort to QE to have the best chance of achieving that goal."
She emphasized that cutting the federal funds rate doesn't guarantee lower long-term yields, noting "it might actually have the opposite effect." While equity investors typically cheer monetary easing, bond investors focus more on fiscal sustainability and Fed independence.
**Hassett Appointment Draws Market Scrutiny**
Widely seen as sympathetic to Trump's rate-cut preferences, Hassett's potential appointment has drawn attention. Trump has indicated he's close to announcing Powell's successor ahead of the May term expiration.
Gregory Peters, co-CIO of PGIM Fixed Income and Treasury Borrowing Advisory Committee member, noted US yields began rising when Hassett was first reported as a leading candidate. Peters said growing likelihood of Hassett's appointment has amplified investor concerns about Fed independence.
Hassett himself stated Monday it would be "irresponsible" for the Fed to pre-determine rate moves over the next six months.
**UK Lesson: The Lasting Cost of Credibility Crisis**
MAN GROUP cited Britain's experience to illustrate central bank credibility's importance. After the Truss government's radical fiscal policies triggered massive gilt selloffs in 2022, UK borrowing costs remain elevated versus G7 peers - demonstrating how credibility damage brings costly, prolonged consequences.
This case directly warns the Fed: When markets doubt policymakers' independence, even accommodative measures may paradoxically push long-term rates higher.
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