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Dow Jones NewsJun 12, 8:23 PM UTC
MW Trump says he'll pick a new Fed chair very soon. What a 'shadow chair' would mean for the stock market.
By Victor Reklaitis
There are expectations the next Fed chief - no matter who it is - will lean toward lower rates, but one analyst stresses markets 'can be pretty disciplining'
President Donald Trump has set off a fresh round of worrying about his approach toward the Federal Reserve with his statement that his pick for the next Fed chair is "coming out very soon."
Trump, who made that statement last Friday while speaking with reporters, also said he has a "pretty good idea" of who he's considering for the post, though he didn't reveal any names.
The next Fed chair is widely expected to make an extra effort to bring down interest rates, given how Trump has pushed for that repeatedly. But analysts warn that announcing the pick this summer - an unusually early rollout - could hurt the economy and markets.
"Bottom line, this would be a high-risk move for the administration in a bid to provide dovish forward guidance and support the U.S. economy, because the undermining of the Fed could have serious consequences for foundational assets like the dollar DXY and U.S. Treasuries," said Tom Essaye, founder and president of Sevens Report Research, which provides analysis for investors, in a note.
Announcing a nominee for Fed chair in June or July - when current chief Jerome Powell's term runs until May 15, 2026 - would be another instance of Trump breaking with recent precedent.
Moreover, the president's remarks from a week ago have brought back memories of his Treasury secretary's proposal last fall for selecting the next head of the U.S. central bank more than a year before the end of Powell's term. Scott Bessent, the Treasury boss, eventually walked back his "shadow Fed chair" plan, which has been viewed as a way to sideline Powell, but it's again on the minds of many analysts and investors.
Some of them say it's unlikely that Trump actually will do a summertime announcement of his Fed pick. If the president does do it, there are expectations that this move in the short term will send stocks SPX higher and push Treasury yields BX:TMUBMUSD10Y lower. In the long term, however, it's viewed as potentially negative for U.S. assets.
Rolling out the Fed pick this summer could "create the perception that President Trump is trying to kind of hurry Chairman Powell's exit," said Michael Strain, director of economic policy studies at the American Enterprise Institute, a conservative think tank. In addition, if Trump's pick were to opine a lot, "that could affect market expectations, and that could affect inflation expectations," he told MarketWatch.
Strain also said he said he'd be surprised if Trump actually decided to have a shadow Fed chair, adding that it would make more sense to announce the nominee somewhat closer to next May, while still allowing time for the process of Senate confirmation. As shown in the table below, some recent picks have been announced three months before the starts of their terms, while others were rolled out four or five months in advance.
In addition, Strain said Trump's approach with the Fed in his current term, such as his talk in April about firing Powell, hasn't been good for the U.S. economy, as it's likely helped keep interest rates elevated - and it also hasn't been in Trump's interests. "Whoever President Trump nominates needs to really work hard to establish his independence and to convince markets that he's going to be independent of the president," Strain said. "It's going to be hard, and I think the person's public statements and testimony and all sorts of things like that are going to be very important and very, very closely scrutinized."
Recent rollouts of Fed picks
Fed chair Announced as nominee Start of term President Ben Bernanke Oct. 24, 2005 Feb. 1, 2006 George W. Bush Bernanke - 2nd term Aug. 25, 2009 Feb. 1, 2010 Barack Obama Janet Yellen Oct. 9, 2013 Feb. 3, 2014 Obama - 2nd term Jerome Powell Nov. 2, 2017 Feb. 5, 2018 Donald Trump Powell - 2nd term Nov. 22, 2021 May 23, 2022 Joe Biden ? ? Presumably after Trump - 2nd term
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.
12 Jun 2025, 8:23 MW Trump says he'll pick a new Fed chair very -2-
One Trump supporter who previously has advised him on economic issues, Stephen Moore, told MarketWatch in an email that his advice would be to pick among four names: Warsh, Hassett, economist Art Laffer or Larry Kudlow, the TV commentator who was NEC director during Trump's first term. Moore also highlighted a recent item in his daily newsletter that described those four figures as the likely finalists and as "inflation hawks who would promote dollar stability," and he said he doesn't know when Trump will announce his choice.
-Victor Reklaitis
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06-12-25 1623ET
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