The shift in the Federal Reserve Chair candidate's direction has suddenly changed market sentiment.

Last Friday, Trump's statement that he is "inclined to retain Haskett" directly stirred the bond market. As Kevin Waugh becomes the hot favorite for the new Fed Chair, Treasury prices have accelerated their decline, with the two-year U.S. Treasury yield soaring to 3.59%, reaching a new high since the rate cut in December last year. Traders' expectations of two 25 basis point rate cuts within the year have directly shrunk, and the rate cut outlook seems to be changing.

Why is the market reaction so intense? The key lies in the completely different policy orientations represented by the two candidates. Waugh has a strong reputation in the central banking circle, but his hawkish genes run deep. During his tenure as a Fed governor from 2006 to 2011, when the financial crisis was at its worst, he was still advocating for rate hikes and continuously warning about inflation risks. Although he later shifted to support rate cuts, his hawkish temperament has not faded. More troubling is Waugh's aggressive attitude towards balance sheet reduction, advocating for a significant shrinkage of the Fed's assets and liabilities, regardless of the pressure on risk assets.

In contrast, Haskett is interpreted by the market as more obedient to Trump, with more policy flexibility.

Interestingly, strategists' predictions are even more thought-provoking. In the short term, Waugh may maintain a moderate stance, but if the economy overheats in 2027-2028, he is likely to revert to his hawkish nature, pushing up long-term bond yields. By then, the game between tightening and rate cuts will become extremely complex.

Powell's term has less than four months to end, and this contest for the Fed Chair is profoundly changing the future interest rate trajectory. If Waugh takes office, whether it will be a complete hawkish return or a swing between dovish and hawkish policies remains to be seen. The market is still observing.