LIVE MARKETS-Stirring the new Fed Chair stew, but what else might be cooking there?

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STIRRING THE NEW FED CHAIR STEW, BUT WHAT ELSE MIGHT BE COOKING THERE?

Markets are already largely pricing in the coming leadership change at the Fed.

In a Macro Strategy note out Wednesday, Wells Fargo analysts are highlighting that the market is putting a greater premium on H2 rate cuts, with June being the most heavily priced cut of any meeting in 2026.

"If markets were more concerned about labor market weakness, we would expect to see more front-loaded easing pricing," the analysts, including Michael Schumacher, write.

Wells Fargo says that prediction markets also suggest an executive-friendly Fed Chair is largely priced in, with Kevin Hassett, and to a lesser extent Kevin Warsh, seen as the two front-runners for the nomination, with a combined probability of 80%.

With markets already pricing in the Fed leadership shakeup, Wells Fargo expects small and short-lived market reactions to any of the main three candidates:

• Kevin Hassett is priced in prediction markets as the most likely candidate to win the nomination, so Wells Fargo believes he would cause only a small U.S. curve steepener and USD sell-off.

• Kevin Warsh is "a bit more of a wild card given past hawkishness and recent dovishness," and Wells Fargo thinks uncertainty around his positions on rates would lead to an even smaller market reaction than Hassett.

• Christopher Waller, as Wells Fargo sees it, is the most market-friendly of the group, with his views only slightly more dovish than current market pricing: "We expect small curve flattening and modest USD upside for a few days if Waller gets the nod."

• A wild-card candidate such as Scott Bessent or Rick Rieder would boost implied cross-asset vol.

According to Wells Fargo, the Lisa Cook Supreme Court case is a more substantial longer-term risk for macro markets than the new Fed chair. Oral arguments are scheduled for January 21, though an actual ruling could still be months away.

"The Cook case is more consequential in our view because a removal of Cook from her role would imply more leeway for the Trump administration to make efforts to remove other FOMC governors. If Cook is ousted, we expect markets to price more easing, steeper curves and a weaker USD."

Wells Fargo adds, "We would also expect these trends to be more persistent if Cook is removed, versus what we expect will be a more short-lived reaction to the new Fed chair announcement."

(Terence Gabriel)

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