Pedestrian silhouettes can be seen passing through the Mariner S. Eccles Federal Reserve building in Washington, DC
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If they are not leading the Federal Reserve, the next central bank chair is facing additional burdens. Now that President Donald Trump has stepped up his efforts to put heavy financial policy effort into his own challenges, he faces credibility issues.
Any successful candidate can simply carry the ghost of being there to bid on Trump’s interest rates, violating the Fed’s traditionally non-political veneer.
To make more influence in the short term, Trump is reportedly considering naming a “shadow chair” until current resident Jerome Powell takes office next year and tries to put pressure on the Fed on the reduction rate.
The prospect leaves a series of thorny questions.
Beyond the troubling logistics of such arrangements, the Fed is institutionally tedious for both financial markets that expect data-driven decisions to be freed from external influences.
“Of course, this is an idea that makes many investors feel uneasy,” said Dario Perkins, a senior European economist at TS Lombard, in a memo on Tuesday entitled “Can I trust the next Fed Chair?” “All of a sudden, everything is that there is a new era of “losing independence” for the Fed and “financial control.” It is not helped by the fact that Trump explicitly links his demand to reduce debt service costs. ”
In fact, Fed officials generally make decisions to serve twin goals, or “double missions,” to promote twin goals, namely stable inflation or full employment.
What Trump has requested is different. He has been hectoring Powell and his fellow Federal Open Market Committee officials in increasingly belligerent conditions to reduce financial costs due to the government’s constant debt load. Trump claims the Fed can save taxpayers about $800 billion by aggressively lowering its overnight funding rate, currently at 4.33%.
Powell and his predecessors have repeatedly held a line that public financial situations do not play a role in rate determination. Turning outside the traditional Fed decision parameters raises more questions for the reliability of the next chair.
Pros and Cons
“The real loser here isn’t Jay Powell, he’s his successor,” Perkins wrote. “We don’t even know who the person is. We already have strong doubts about their integrity and what kind of “deals” they have made. But it is clear that Powell’s alternatives will come with an “implicit understanding” to cut costs. ”
Certainly, central bank experts have admitted that Trump has some advantage in wanting to go beyond the game when naming his next Fed chair.
As Powell’s term as chairman ends in May 2026, appointing a replacement probably months earlier gives candidates the opportunity to pass the Senate confirmation process and to tragically liability that their position will pose.
But Trump’s thinking is different.
Such a “shadow chair” will be implemented almost explicitly, with market understanding and in conjunction with the statements made by Trump and his eu on the issue, to undermine Powell. If Powell is not pushing for rate reductions, Shadow Chair can simply make an official statement against its position.
However, finding candidates to play the role may not be that easy given the risks of reputation.
“From a candidate’s perspective, there is nothing good about being nominated in advance and expected to work as a Shadow Fed chair.
“It can lead to reputational damage. It can lead to pressure to say and do things to take up an appointment that you actually want to say or do,” he added. “It could lead to your nomination being yanking. It could lead to all sorts of bad things. So no one wants to put up with Fed chair work early, except for someone who was told they wouldn’t get it if you didn’t.”
The market may not like it
Treasury Secretary Scott Becent, along with several others, has been prominently mentioned as a potential Powell alternative.
In an interview with Baron on October 9, 2024, a month before Trump’s election victory, Bescent said, “You can make the earliest Fed nomination and create a Shadow Fed chair.” In those cases, “No one really cares about what Jerome Powell has to say anymore.”
It is unclear how financial markets will respond to such scenarios. But Wall Street is notoriously reluctant to averse uncertainty, especially as sensitive as monetary policy.
The Fed’s last cut was in late 2024 when stocks rose, but the Treasury harvested while the dollar was falling. Rate cuts of the size Trump wants – more than 2% points – could stimulate inflation fears and send Treasury yields again.
“There could be a good case to nominate the next Fed Chairman a few months before the May 2026 handover,” Krishnaguha, head of Global Policy and Central Bank Strategy at Evercore ISI, said in a recent memo. “But nominating the next Fed chair with the hope that this person will be a positive alternative voice for monetary policy for the best part of the year will disrupt the market, make the Fed shattering rate expectations and potentially difficult in ways that don’t help with advance interest rate cuts.”
Trump has a set of logistics to navigate as he pushes his desire for lower fees.
The rate reduction is not certain
There will be only one vacancies in the future on the Governor’s Committee, with Adriana Coogler’s term at the end of January 2026.
Powell’s time as a chair will run in May 2026, but he will be able to remain as governor until 2028. If Powell doesn’t go that route, he forces Trump to nominate the current sit-in governor as his successor, eliminating presumed candidates such as Bescent, former governor Kevin Wahsh and current National Economic Council leader Kevin Hassett.
Additionally, the chairman is one of the 12 voters of the Federal Open Market Committee. Currently, policymakers have different views on how quickly interest rates should drop, but none of the members have shown they support the kind of cuts Trump wants.
Investors will take a closer look into the Fed’s thinking when minutes of the June FOMC meeting are released on Wednesday.
“This is all somewhat unprecedented in how things develop,” Menand said. “But I think it’s safe to say that depending on how it’s unfolding, it will ultimately calm expectations and that some of these dynamics could change how they unfold in the fall.”
The market expects the Fed to start cutting again in September, but the route from there is unclear. If Trump names the shadow chair in the fall, it runs both risks that it will cause problems for the person he chose.
“It could actually be ineffective or very destructive in Powell’s ability to govern the rest of his term, depending on who it is,” Menand added. “What would actually happen if a person was given a name in advance? The devil is a detailed one.”
