Introduction to the Conflict
Under normal circumstances, moderating inflation and a weakening labor market would make an easy case for interest rate cuts. However, these aren’t normal times, and a scattering of headwinds on the horizon have made Federal Reserve officials leery of easing monetary policy for fear that the inflation fight isn’t over. This sentiment is setting up an intensifying conflict between the White House and the central bank that could result in President Donald Trump taking the unusual step of naming a “shadow” chair whose responsibility it would be to watch over the Fed and Chair Jerome Powell until a permanent chief can be installed next year.
The Concept of a "Shadow Chair"
There is “fresh buzz” around the idea that Trump could announce his choice to succeed Powell soon, “as a shadow Fed chair in the interim,” until the central bank chief’s term ends. The idea would be to accelerate the timeframe over which the administration can put its stamp on the Fed and influence rates markets while avoiding the nuclear option of trying to fire Powell. However, the practicality of such a move is sketchy, with no imminent vacancies on the Fed’s board of governors and the impact of such a “shadow chair” likely being minimal.
Impact on Monetary Policy
The stakes were raised following a comparatively benign inflation report showing prices up just 0.1% in May, and after Vice President JD Vance joined Trump in urging the Fed to cut rates. The candidate list for chair seems to have been narrowed, and Trump noted that he expects to make his preference public soon. The list of apparent finalists includes former Fed Governor Kevin Warsh, current Governor Christopher Waller, Treasury Secretary Scott Bessent, and National Economic Council Director Kevin Hassett.
Evaluating the Candidates
Each candidate has assets and liabilities, but the most important quality could be a tilt towards sharply lower rates, with an aggressive timetable. Billionaire investor Paul Tudor Jones said during a Bloomberg News interview that he thinks Trump’s going to pick someone who’s going to be uber-dovish. Powell has been reluctant to push for cuts until the longer-term effects of Trump’s tariffs can be better gauged. As Jones sees it, Trump has no other choice than to swing away from the moderate-to-hawkish Powell with the U.S. in a “debt trap” that eventually will cause a market revolt.
The Debt Trap and Its Implications
The budget deficit is heading toward $2 trillion for 2025 and actually is above 6% of GDP. Costs to finance the $36 trillion debt are estimated at $1.2 trillion this year and likely could be headed north of that as Treasury yields remain lofty. The easiest way for the U.S. to ease some of that burden would be Fed rate cuts that at least would ease some of those financing costs, which are running higher than any other budget category except Social Security and Medicare.
Candidate Analysis
Evercore analyst Krishna Guha sees positives and negatives in each prospective candidate. Warsh has direct Fed policy experience but may be perceived as hawkish on inflation. Bessent has market bona fides but lacks monetary policy experience and may be seen as too close to the Trump administration. Hassett has solid economic credentials but limited monetary policy experience and also may be perceived as too close to the administration. Waller has the benefit of a folksy demeanor and has advocated for “good news” rate cuts, but his support for the 50 basis point rate cut last September could work against him.
Conclusion
For Trump, the challenge will be to pick someone credible who shares his vision on lower rates and easier policy and who can get through a Senate confirmation. Hopefully, whoever is selected is an individual that feels strongly that monetary policy should be set consistent with the dual mandate and not be politically influenced. The future of monetary policy hangs in the balance, and the decision on the next Fed chair will have significant implications for the economy and the country as a whole.
