Heavyweight! Is the "Shadow Federal Reserve Chairman" coming?
U.S. Treasury Secretary nominee Waller is expected to be nominated as the next Federal Reserve Chair. Analysts say that the "shadow chair" may intervene in the direction of monetary policy ahead of officially taking office in 2026, conveying Trump's preference for "low interest rates," which could exacerbate the risk of soaring inflation. At the same time, the Federal Reserve Chair does not have complete decision-making power over policy rates, which may also make the outlook for monetary policy more uncertain
Trump plans to intervene in monetary policy decisions by appointing the Federal Reserve Chairman in advance?
According to media reports on Friday, dark horse candidate Kevin Warsh is expected to win the position of U.S. Treasury Secretary and may also be nominated as Federal Reserve Chairman after Powell's term ends in May 2026.
Another former popular candidate for Treasury Secretary, Bessent, seems to have anticipated this unusual decision.
In an interview with the media in October this year, Bessent stated, Trump is likely to have the Republican-controlled Senate confirm his successor in early 2025 (before Powell's term ends), thereby establishing a "shadow" Federal Reserve Chairman.
“(Trump) can establish a 'shadow' chairman by nominating the next Federal Reserve Chairman in advance.”
“Once there is a 'shadow' Federal Reserve Chairman and forward guidance, no one will really care about Powell's statements anymore.”
Analysts point out that although Bessent's idea is unprecedented, it could indeed be adopted by Congress.
What impact would establishing a "shadow chairman" have on the Federal Reserve?
The newsletter "Very Serious" commented that as Trump is about to take office as President of the United States, he is expected to gain more control over monetary policy, guiding the policy path towards low interest rates.
The article states that the Federal Reserve largely operates through forward guidance—not only by setting today's short-term interest rates to influence long-term rates but also by informing market participants how it intends to set future rates to influence long-term rates.
This means that the designated future chairman could influence monetary policy in 2025 simply by stating what he or she intends to do after taking office in 2026.
This implies that if Warsh is indeed favored to become the next Federal Reserve Chairman, he would intervene in Federal Reserve decision-making earlier and, to some extent, convey Trump's monetary policy tendencies, undermining the independence of the Federal Reserve.
The article analyzes that although establishing a "shadow chairman" can intervene in the monetary policy path to some extent, the final interest rate decisions are made collectively by the 12 members of the Federal Open Market Committee (FOMC), and Trump cannot "control" the direction of interest rates.
Therefore, the analysis speculates that appointing a "shadow" chairman whose views are inconsistent with those of the current chairman and other FOMC members may increase market uncertainty regarding future monetary policy. This uncertainty could lead to an increase in risk premiums associated with long-term fixed-rate debt, thereby causing some politically significant interest rates (such as mortgage rates) to rise.
Meanwhile, the article also points out that due to the federal government maintaining a high deficit, the economy has been overly stimulated, if the "shadow chairman" truly manages to lower interest rates and leads to unexpectedly loose monetary policy next year, the likely consequence could be soaring inflation. Article Warning:
"If Trump wants to play stupid games with the Federal Reserve, he will win a stupid prize."