Under normal circumstances, easing inflation and weakening the labour market are simple cases of interest rate reductions.
But these were not normal times, and scattering headwinds on the horizon made Federal Reserve officials more at ease in fear that the battle for inflation would not be over.
That sentiment sets up a escalating conflict between the White House and the central bank, which means President Donald Trump will take the extraordinary step of naming the “shadow” chair responsible for monitoring the Fed and chairman Jerome Powell until a permanent chief can be established next year.
There is a “fresh topic” in the idea that Trump could announce his choice to make Powell a success “as a shadow chair in the interim” until the end of his central bank chief’s term.
“The idea is to accelerate the time frame where the administration can place its stamp on the Fed and influential markets, whilst avoiding the nuclear option to fire Powell,” Guha wrote.
The practicality of such movements is rough. There are no immediate vacancy on the federal board. His governor will run until 2028, with the exception of Powell, a frequent Trump target whose term as central bank chief expires in May 2028.
Furthermore, the effects of such “shadow chairs” would be minimized. It would be hard to find more than one or two people who would vote seven votes to the Federal Open Market Committee to move their policies and support the aggressive interest rate cuts Trump is sought.
Still, at least the person he wants as a chair now could send an important message to the market about the path Trump wants to see the Federal Reserve. The bets were raised Wednesday following a relatively benign inflation report showing prices that rose just 0.1% in May, after Vice President JD Vance joined Trump and urged the Fed to cut fees.
New Chair Betting
The list of candidates for the chair appears to have been narrowed, noting that Trump hopes to release his preferences soon on Friday. White House officials did not respond to requests for comment Wednesday.
The list of apparent finalists includes former Fed Governor Kevin Wahsh, current Governor Christopher Waller, Treasury Secretary Scott Bescent and National Economic Council director Kevin Hassett. Each has assets and liabilities, but the most important quality can lean towards a sudden, lower rate with a positive schedule.
“I think Trump will choose someone who will be super dovish,” billionaire investor Paul Tudor Jones said in an interview with Bloomberg News on Wednesday. “We are financially constrained, and as far as we can see, we have a budget deficit of 6% plus (compared to GDP).
Powell was reluctant to push for cuts until the long-term impact of Trump’s tariffs could be better appreciated.
As Jones sees it, Trump has no choice but to sway from medium to Hawkish Powell with the US in the “debt trap” that ultimately causes a market rebellion.
The fiscal deficit is heading towards $2 trillion in 2025, actually exceeding 6% of GDP. The cost to fund the $36 trillion debt is estimated at $1.2 trillion this year, and could be heading north as the Treasury yield remains long. The easiest way for the US to ease some of its burden is to reduce interest rates that at least ease some of the funding costs that operate higher than other budget categories except Social Security and Medicare.
So which one will Trump turn?
Candidate evaluation
Evercore analyst Guha sees positive and negative aspects in each candidate.
He said, “the advantage is that he has direct Fed policy experience, well known to markets and Fed officials, and is perceived as independent while maintaining honest and constructive relations with the Trump administration.”
His shortcomings: It leaned towards Hawkishness on inflation from the expanding balance sheet policy that has been a hallmark of the Fed since the 2008 financial crisis.
In Beast, which appeared as a favorite this week, according to a report by Bloomberg, his advantage is the authenticity and height of the market as the “room adult” of the Trump administration’s organised chaos. But lack of experience in monetary policy and the perception that he is “too close to the Trump administration and not fully independent” could work perceptually against him, Guha said.
The longer range, Hassett has solid economic qualifications, but he has limited experience in monetary policy and may be perceived as too close to the administration, Guha said.
Finally, Waller has the advantage of Folksey’s attitude as recent statements advocating for a “good news” rate cut later this year could be in good condition with Trump. However, he was able to pay the price to help cut the 50 basis point rate last September, ahead of the November presidential election.
For Trump, the challenge is to choose people who can share their vision for lower rates and easier policies and who can overcome the Senate confirmation that Republicans have retained their advantages.
“Hopefully, anyone chosen is an individual who strongly feels that monetary policy should be set to be consistent with a double mission and not politically affected,” former Boston Industry President Eric Rosengren said in an interview with CNBC on Wednesday. “But I can’t see that yet.”