Kevin Hassett Says He Would Be Independent at the Fed. Some Who Know Him Worry.

Kevin Hassett, current director of the White House’s National Economic Council. (HAIYUN JIANG/The New York Times/Redux)

Barron’s spoke with former colleagues of the leading candidate to replace Chair Jerome Powell.

President Donald Trump has said he has narrowed down his choice for the next chair of the Federal Reserve to one person, and hinted that it will be Kevin Hassett, now director of the White House’s National Economic Council.

Under any other Republican president, Hassett’s nomination might not be controversial. Hassett has strong academic credentials and has had a long career in public policy, including an early stint at the Fed. He was confirmed by an overwhelming majority of 81 votes in the Senate to be chair of the Council of Economic Advisers during Trump’s first term. Hassett can take at least partial credit for the 2017 tax cuts that lowered corporate rates—a feat that one of his friends says must have been a dream come true, given his supply-side economic inclinations.

But Trump, and Hassett’s loyalty to him, complicates the picture and may put limits on how far down he could force interest rates as Fed chair. A Fed chair can’t change the world on his own; cajoling other Fed officials to back his views requires credibility, among other factors.

Trump’s attacks on current Fed Chair Jerome Powell, whom Trump nominated to the job in 2017, have raised fears among economists that any replacement won’t be truly independent of White House influence. Trump has done little to dispel such worries, telling Politico in an interview published on Tuesday that he would make lowering interest rates a litmus test for the next chair.

On Wednesday, after the Fed cut its federal-funds rate target range by a quarter of a percentage point, to 3.50% to 3.75%, the president called Powell a “stiff” and groused that the rate cut “could have been doubled.” Trump has called for the Fed to lower its benchmark interest rate to 1% or less, to help finance the national debt, among other aims. While Fed officials have lowered rates this year to bolster a weakening labor market, they have been reluctant to enact dramatic cuts in the face of persistently elevated inflation.

Barron’s recently spoke with people who have worked with Hassett throughout his career to try to get a sense of how he might act as Fed chair. Some support him wholeheartedly. But several who knew him well, including some who wouldn’t speak on the record, said that his loyalty to Trump in the second term has changed their perceptions of him. Their worry wasn’t that Hassett would propose problematic economic policies, but that his allegiance to a president who seeks to influence a Fed so directly could compromise his independence as chair.

Whatever Hassett thinks, as Fed chair he may find it hard to shake off the perception that he is doing the president’s bidding, no matter the economic consequences. That is likely to be true even though Hassett can make a reasonable case for cutting rates, given the long-term inflation outlook. In other words, he doesn’t need to take orders from Trump to conclude that interest rates should be lower.

Investors have little concern for now about the possibility of Hassett’s leadership. Equity markets are trading at record levels, and bond investors appear to be suspending judgment, much as they would for any new chair.

Hassett declined requests for an interview sent through the White House and in a brief interaction on Tuesday.

“President Trump has assembled the best, most experienced economic team in modern history to help end Joe Biden’s inflation crisis and restore the prosperity Americans enjoyed during the first Trump term. Until an announcement is made by President Trump, however, any discussion about Federal Reserve nominations is pointless speculation,” said White House spokesman Kush Desai in an email.

Hassett’s nomination may not be a done deal, but much is known about the selection process. Treasury Secretary Scott Bessent has narrowed down the search to five candidates, including Hassett, and has said he expects to finish the vetting by late December. Lately, Trump has also mused about picking someone not on that list: Bessent. Trump has repeatedly raised the prospect of Bessent taking the Fed job, only to say that Bessent doesn’t want it. Confusingly, Trump has also said he has narrowed the choice down to one person, although he won’t confirm who that is.

Hassett acknowledged on Tuesday the odd position in which he has been placed. Trump “makes his choice, and then he changes his mind,” Hassett said at a Wall Street Journal event.

Bessent, he said, would be at the top of his own list of Fed chair recommendations, but, he added, “Scott’s going to stay at Treasury.”

Regardless, Hassett has made his case, and shared his views, including in an interview at the New York Economic Club in November. He worked at the Fed from 1992 to 1997 under former Chair Alan Greenspan. “I worked closely with Alan Greenspan at times and have seen what’s good and bad about the way the Fed people think. And there’s a lot of bad,” Hassett said.

Hassett wants to address what he sees as outdated thinking among Fed staff members, saying they rely too much on old models that produce inaccurate economic forecasts. He has endorsed calls for downsizing, reforming, and auditing the Fed. He has said he agrees with a policy essay by Bessent that calls for giving control of the Fed’s balance sheet to the Treasury while trimming it further.

Hassett didn’t express reservations about the Fed during his time there, according to some of his former Fed colleagues, who said he seemed to fit in well at the institution. Hassett worked in the research division studying business fixed investment. He had completed a doctorate in economics at the University of Pennsylvania and started a promising academic career at Columbia University, but left to follow his wife, who took a job in Washington.

People who worked alongside Hassett at the Fed remember him as a clever, evidence-driven economist. He was a “Chicago School, efficient-markets guy,” as one put it. The Chicago School is a prominent branch of free-market economics associated with Milton Friedman. The efficient-markets hypothesis holds that asset prices reflect all available information. Hassett’s beliefs about the stock market would later produce a book that many now see as an error, but his academic research on how lowering taxes can spur business and economic growth was—and still is—widely respected among economists.

Hassett describes himself as a supply-side economist, a philosophy associated with Republicans since the presidency of Ronald Reagan. Supply siders argue for cutting taxes to spur growth that will then offset the lost tax revenue.

Hassett’s conservative leanings didn’t show up at work at the Fed. “There was no talk about the political side; there was almost no politics in terms of what we did,” says Gregory Brown, a professor of finance at the UNC Kenan-Flagler School of Business.

Brown worked under Hassett at the Fed and says he would make a good chair.

“I don’t have any sense that he has any animus or grudges or lack of respect for the Fed as an institution,” says Christopher Carroll, an economics professor at Johns Hopkins University who also worked with Hassett at the Fed in the 1990s. Hassett attended Carroll’s wedding.

Hassett began to indulge his more political bent after leaving the Fed for the American Enterprise Institute, a conservative think tank. He wrote widely there, and advised the presidential campaigns of John McCain, George W. Bush, and Mitt Romney. All three ran on the free-market, low-tax economic philosophies long associated with the Republican Party.

It was during his think-tank stint that Hassett wrote the work that probably gained him the most renown before his current job in the White House. In 1999, Hassett published Dow 36,000, a book he co-authored with James Glassman, a former journalist who would go on to work for the George W. Bush administration. The idea, as the title suggests, was that the Dow Jones Industrial Average would quadruple within three to five years to reach 36,000. Investors were only just coming to appreciate that the risk premium for stocks wasn’t nearly as high as it seemed and would proceed to bid up shares quickly, they wrote.

Instead, the stock market tanked in 2000 as the dot-com bubble burst. The Dow didn’t hit 36,000 until 2021.

Glassman says it’s obvious in hindsight that they were overconfident about the risks, although Hassett has seemed more willing to defend their position.

“I really myself realized that I should have had more faith in the market itself, rather than saying, ‘I think the market should be this or that.’ From what I’ve read and talked to Kevin about, he’s not willing to give up on that,” Glassman says.

The two are friends, but they no longer see eye-to-eye on policy, Glassman says. “I don’t always agree with Kevin, certainly on economic issues. Let’s put it this way. I used to.”

Glassman says he objects to what he sees as the second-term Trump administration’s “extreme interventions” in the market, including through tariffs and government intrusions into individual companies such as Intel and U.S. Steel. Hassett has defended both policies publicly. If he is giving different counsel to Trump behind closed doors, neither is saying.

Glassman isn’t sure whether Hassett has changed his mind in favor of a less free-market ideology or is just doing his best to support the man half of the country picked for president, twice. “You give up a lot of your autonomy when you go to work for a presidential administration. It just becomes a question of degree, like, how far do you want to go?” Glassman says.

Glassman believes that the old Hassett will resurface, should he become Fed chair. “I just don’t think he would give up his principles as Fed chairman, as opposed to the position he’s in today,” he says.

Hassett has said he’ll remain independent. If the president pressures you on rates, “you just do the right thing,” Hassett said on Tuesday. Hassett’s loyalty is “to my judgment, which I think the president trusts, and the firm commitment to not being partisan,” he said.

Trump tends to see partisanship in many places, a trait that has prompted him to take actions that Hassett has defended.

The president fired Erika McEntarfer as commissioner of the Bureau of Labor Statistics on Aug. 1 after the agency revised down some job figures. Trump said the numbers were rigged to make him look bad. Hassett defended the decision on Aug. 3 on Meet the Press. Pushed for hard evidence that job numbers were rigged, Hassett said, “The revisions are hard evidence.”

“The firing of the BLS commissioner was off the charts,” says Ethan Harris, a former head of global economics research at BofA Securities and a longtime Fed watcher. “Virtually every economist thinks that was a terrible idea.”

There are widely acknowledged problems with the BLS’ data collection, Harris says, but if anything, Trump’s attack on the agency makes them harder to fix by politicizing the problem.

Hassett’s willingness to defend those and other decisions has some economists worried.

“He doesn’t seem to be worried about his professional reputation,” says Carroll, the Johns Hopkins economist who worked with Hassett at the Fed.

Service at the Fed has long been seen as a mark of distinction among economists because of the institution’s commitment to objective, rigorous analysis. Staff members there come from widely different backgrounds but share the language of economics. Carroll is concerned that Hassett no longer appears to speak that language, or that he pays it lip service only. “It makes you wonder if there is any anchor for the things he might do if they aren’t anchored in what economists believe,” Carroll says.

Investors and other analysts of the Fed pore over every word the institution’s officials utter, looking for clues to rate decisions. Chairs have understood that consistency and intellectual credibility are vital to their ability to steer policy and calm the market. “Predictability is part of the secret sauce of having a good central bank,” says Carroll. “It is hard to predict what Kevin will do” if he becomes Fed chair.

Hassett’s longstanding commitment to unleashing business growth has left some who know him baffled that he endorsed Trump’s second-term tariff blitz. Hassett resigned from the Council of Economic Advisers in 2019 as Trump moved to put in place the beginning of his tariff policy, which was much smaller and more targeted than in his second term. Reports in the first term suggested the CEA had advised that the tariffs would be costly. Hassett denied that his decision to leave had anything to do with tariffs.

But some who worked with him at the time see a sharp shift in Hassett’s positions from the first to second Trump terms.

“It’s been sad to see the disavowal of every policy position he ever stood for,” says a former senior White House official from the first term who worked with Hassett.

The financial markets seem less troubled.

The yield on the 10-year Treasury note has risen from 4.0 to 4.2% since late November, when news reports suggested that Hassett had become the front-runner. That has steepened the so-called yield curve, with longer maturities rising more than shorter ones. That could be a sign that investors expect the Fed will keep rates low while inflation rises.

But markets move for many reasons. Break-even rates, another measure of inflation worries, have risen by only a 20th of a percentage point in that period.

“The fact of the matter is, the market is not buying the Fed capture scenario,” says Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.

The Fed chair is only one of 12 votes on the rate-setting FOMC. Hassett, if nominated and confirmed by the Senate, is likely to replace Trump appointee Stephen Miran on the committee, which would mean swapping one advocate for deep rate cuts with another. Even if Hassett were to take orders from Trump, the rest of the FOMC would be unlikely to go along with him.

That said, Hassett can and probably would make his own arguments for lower interest rates. Hassett believes that growth next year will be far higher than the 2% that many economists expect. While some would worry that rapidly accelerating growth might worsen inflation, prompting rate hikes, Hassett’s supply-side philosophy tells him otherwise.

Hassett has argued that the U.S. is undergoing a productivity boom much like the computer revolution of the 1990s. Greenspan, then Fed chair, was lauded for seeing that the growth of that era wouldn’t be inflationary. He kept rates low. Hassett wants to do the same.

Today, Hassett says, Trump’s tariffs and tax cuts are driving factory construction. That means the stock of capital is growing. “With productivity growth plus capital stock growth, you’re looking at the underlying potential GDP growth that’s way north of three, maybe north of four [percent],” he said at The Wall Street Journal event on Tuesday. “There’s a lot of room for doing something like making the interest rate lower, which would increase aggregate supply and aggregate demand.”

There is a long-running debate in U.S. politics about whether supply-side tax cuts really drive enough growth to pay for themselves. But what matters for Fed independence is that Hassett is a true believer in it, says Harris, the Fed watcher. “That supply-side focus of his has been a part of his intellectual foundation as an economist. This makes it possible for him to both be loyal to the president and be an independent chair.”

Plus, merely pushing for a big rate cut probably wouldn’t upset markets.

“The U.S. has a special place in global capital markets,” Harris says. The dollar is the global reserve currency, while Treasuries are a vast and liquid market. “It is hard to overturn that advantage,” he says. “For investors to give up on confidence in the Fed and the U.S. markets, it requires a kind of a pretty big shock.”

That shock could come, Harris says, but it would take a catalyst, and so far, there doesn’t seem to be one.

Hassett hedged on Tuesday when asked if he would commit to lowering rates to the level Trump wants. He would keep cutting “if the data suggests that we could do it,” he said. “Right now, I think there’s plenty of room to do it.”

That language sounds more like the data-dependent Powell than a MAGA zealot. And it is probably what investors want to hear. Like a presidential candidate who has won a primary, Hassett appears to be tacking back to the economic middle. And like any politician, his motivations are ultimately less important than the actions he takes.

Write to Matt Peterson at matt.peterson@dowjones.com