Fixed Income performance in the first half of the year was solid yet tenuous. Interest rate volatility hit a two-year high in April as the threat of tariffs and trade disruptions loomed large. These disruptions proved to be short-lived, however, and by the end of the second quarter interest rates had broadly declined as the prospect of rate cuts advanced. However, despite the downward trend in yields, discontent in the White House vis a vis Federal Reserve policy became increasingly loud and public. President Trump has the explicit goal of lowering rates very substantially which contrasts starkly with Chair Powell’s patient posture. Due to their fundamental disagreement on policy, the discussion around who will replace Powell when his term as Fed Chair ends in 2026 has advanced to the forefront.

Musical (Fed) Chairs: A look at potential successors to Jerome Powell

  1. Chris Waller, Federal Reserve Governor.
  • One of the clear frontrunners to replace Powell in 2026. Waller is a prominent voice in U.S. monetary policy with a credentialed background that justifies an appointment. Since joining the Board of Governors in 2020, he has generally been on the right side of policy debates. He was known as hawkish (i.e. supporting tighter monetary policy and higher rates) in 2021-22 as inflation rapidly increased. However, in 2024, his view evolved to supporting rate cuts if the labor market were to weaken materially. Most recently in 2025, Waller has been one of the few voices to support a rate cut in the near future.
  • Strategic logic: Trump nominated Waller in 2020. Furthermore, Trump has the opportunity to promote Waller to chairman and backfill another governor seat, increasing his administration’s influence on the Board. Lastly, Waller is the leading voice for loosening monetary policy which is President Trump’s explicit goal. It feels as though this is Waller’s race to lose.
  • Recent commentary:
    • Openness to a Near-term Cut: He indicated the Fed could be in a position to cut interest rates as early as July. He referred to this as a potential “good news” rate cut, suggesting it would be a result of positive progress on inflation, rather than a response to a faltering economy.
    • Proactive Stance on the Labor Market: He has expressed a desire to not “wait until we actually see it crash before we start cutting rates.”
    • Downplaying Tariff-Driven Inflation: He views the inflationary impact of tariffs as a “one-off level effect” and would not lead to persistent inflation. He has stated he would “look through” any temporary price spikes caused by trade policy when considering policy adjustments. He’s also said, “trend inflation is looking pretty good,” highlighting his more optimistic view than most other Governors.
  1. Scott Bessent, Treasury Secretary.
  • His views on monetary policy are likely conventional but with a clear preference for lower rates, in line with his current stance as Treasury Secretary.
  • Strategic logic: 1) He is a Trump ally (potentially the only thing that matters in the context of this discussion), 2) he has intimate knowledge of Treasury operations, which would be useful under a new regime of closer collaboration between the Fed and the Treasury, and 3) Bessent could cycle out of the Treasury as a means of shifting the narrative and/or taking blame for trade & tariff policies.
  1. Kevin Warsh, Former Federal Reserve governor from 2006 to 2011. Currently a Visiting Fellow at the Hoover Institution.
  • Known to be close with Trump and was a top contender for the Chairman position during President Trump’s first term, before Powell was ultimately selected.
  • Strategic logic: He has criticized the Fed for its mission creep, straying from the primary mandate of price stability, and being complicit in the explosion of national debt. He supports a “strategic reset” which may appeal to Trump.
  • Notable Commentary: “I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed.”
  1. Kevin Hasset, Director of the National Economic Council and former Chairman of the Council of Economic Advisors from 2017-2019.
  • He is generally considered a policy “dove” who favors lower interest rates to maximize growth. His stance aligns with President Trump’s call for lower interest rates. It’s possible he would have a higher tolerance for inflation than recent Fed chairs if the outcome was faster GDP growth. He would be a notably less technocratic Chairman than Jerome Powell or Janet Yellen before him.
  • Strategic logic: As a key Trump advisor since 2017, Hassett is a go-to policy man. He was a key architect of the 2017 TCJA bill, and now with the recent passing of the OBBBA, Hassett may be “freed up” for another role. His appointment would likely be seen as bending the Fed toward President Trump’s economic worldview. Hassett’s appointment would likely receive heightened scrutiny as it relates to the Fed’s independence.

Other Items of Interest

Year-to-Date Performance

  • Through the end of the second quarter, Fixed Income performance was led by convertible and high yield corporate bonds, followed closely by the U.S. Aggregate Bond Index, with long-term Treasuries lagging albeit still positive on the year.

Medium and Long-Term Yields Fall in the Second Quarter

  • Despite the Fed’s lack of conviction for rate cuts in 2025, the decline of medium-term yields (particularly the 2- through 5-year section of the yield curve) indicates the market expects additional rate cuts in future years.

Source: FactSet

June FOMC Dot Plot

  • A key takeaway from the June meeting was the reduction of forecasted rate cuts by Federal Reserve members, represented by the chart below. On net, one cut was removed from 2026 and another from 2027.

 

Source: FOMC, Bloomberg

Fed Funds Futures Pricing

  • Despite the slower path of rate cuts indicated by the Federal Reserve’s “Dot Plot”, the market is pricing an 80% probability for 2 or 3 rate cuts this year. This puts the market firmly ahead of Fed projections.

Source: CME Group