Other analysts have made similar points as Strain.
“A good case could be made for nominating the next Fed chair a few months before the handover in May 2026. But nominating the next Fed chair now, with the expectation that this person would be an active alternative voice on monetary policy for the best part of year would confuse the market, making it harder for the Fed to shape rate expectations and potentially impacting risk premia and inflation expectations in ways that would not help advance rate cuts,” said a team of Evercore ISI analysts led by Krishna Guha, in a note. Guha is a former top Fed staffer and now Evercore’s head of central-bank strategy.
‘Serious consequences for foundational assets’
The Sevens Report’s Essaye said a “shadow Fed chair” approach could have a positive outcome for U.S. investors initially, if markets view the incoming chair as independent but also more inclined to cut rates than Powell. “That’s the best case and it should lower rates and send stocks higher, led by cyclical sectors like small caps IWM, industrials XLI, financials XLF, materials XLB, energy XLE and lofty-valuation tech XLK,” he wrote. But he also warned about the potential for negative outcomes.
“Perceived Fed independence is a critical pillar of American economic exceptionalism and if Trump’s shadow Fed chair is seen as being an instrument of the administration, then that could seriously undermine the inflation-fighting reputation of the Fed and further reduce the appeal of U.S. assets globally,” Essaye said.
Trump’s latest comments about picking a new Fed chair have come as he keeps putting pressure on Powell’s Fed to lower interest rates. The president called for an interest-rate cut of a full percentage point on Wednesday following an inflation reading and made that same call last week after the latest jobs report.
In addition, Trump said in mid-April that Powell’s “termination cannot come fast enough,” before ratcheting down his rhetoric a few days later by saying he had “no intention of firing him.” The two met privately at the White House in late May, but there was no meeting of the minds on the path of interest rates.
Not so independent, but also many bosses?
It’s possible to go too far in thinking about the Fed’s independence from politics, according to Sarah Binder, a senior fellow at the Brookings Institution and a professor of political science at George Washington University.
“We have this notion of Fed independence, and the notion that once on the Fed, the chair is quite committed to maintaining that isolation and insulation from politics. But in reality, presidents use their picks all the time – even on Fed chairs – to find someone they think will be responsive to their broader economic agenda,” said Binder, whose books include “The Myth of Independence: How Congress Governs the Federal Reserve.”
“Trump’s unusual in trying to dictate great changes, but presidents typically do like more dovish Fed chairs,” she added. Another point to keep in mind, according to Binder, is that presidents sometimes don’t get what they want or what they expected with their Fed picks. She pointed to former President George H.W. Bush’s well-known remark that pinned his loss in the 1992 White House race on the Fed chief of that era, Alan Greenspan, who was reluctant to cut rates. Bush said in 1998: “I reappointed him, and he disappointed me.”
In addition, Binder pushed back on the idea that the next Fed chair is certain to cut rates with gusto.
“Bond markets can be pretty disciplining on the Fed and presidents, so if you had a Fed chair come in who was committed to cutting rates explicitly, regardless of the state of the economy or the state of inflation, I think you’d find an adverse market reaction pretty quickly,” she told MarketWatch. Binder said there’s a “focus on the president, and for good reason, but the Fed has a lot of audiences,” including Congress, markets, the banking industry KBE and other industries.
“There are a lot of people with a vested interest in what the Fed does, and so the Fed chair has more than one boss,” she said.
Who could be the next Fed chair?
Kevin Warsh, a former Fed governor, has been viewed as the front-runner to replace Powell for months, and he probably has helped his chances with his recent sharp criticism of the central bank. He has said the Fed talks too much and gets too involved in social issues.
Warsh recently was getting a 44% chance of becoming Trump’s nominee in one betting market, Kalshi. Bessent, the Treasury secretary, was second at 33%, while Fed Governor Christopher Waller stood at 20%, and Kevin Hassett, director of Trump’s National Economic Council, was at 15%. Other names were at a 5% chance or lower.
Bessent moved into second after a Bloomberg News report on Tuesday said he was under consideration for the Fed post. It’s worth noting that betting markets can be poor predictors for several reasons, including the fact that bettors often get caught up in narratives.
Bessent himself played down the report, saying he already has the best job in Washington, D.C., and that he hoped to stay in it for four years. The report also said formal interviews for the Fed job have not begun. The White House didn’t immediately respond to MarketWatch’s request for comment on whether interviews were underway, but a senior administration official said it was “complete fake news” that Bessent was under consideration.
Evercore’s analysts said Warsh and Bessent look like the front-runners, followed by Hassett and Waller.
