The sudden shift in the outlook for the Federal Reserve Chair candidate has caused a corresponding change in market sentiment.

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

Why is the market reacting so strongly? 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 traits run deep. During his tenure as a Federal Reserve Board member 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 stance on 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 and more flexible in policy.

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 battle between tightening and rate cuts will become extremely complex.

With less than four months remaining in Powell's term, this contest for the Fed Chair is profoundly changing the future direction of interest rates. If Waugh takes office, it remains to be seen whether the hawkish stance will fully return or if a dovish-hawkish swing will occur in response to circumstances; the market is still observing.