Trump may "get along" with the Federal Reserve on independence issues

According to analysts at Piper Sandler, President-elect Trump is unlikely to appoint a so-called "shadow" chairman to undermine the position of current Federal Reserve Chairman Jerome Powell.

Although Powell's term does not end until 2026, media reports indicate that some of Trump's advisors are urging him to appoint a successor to the Federal Reserve chairman. Piper Sandler analysts stated that this successor would make statements different from Powell's, potentially persuading the bond market to focus on this new official rather than Powell and the Federal Reserve.

In a report to clients, the analysts wrote: "This way, the White House could seize control of the transmission of monetary policy."

Last week, Powell firmly rejected the notion that Trump might fire him, stating to reporters that he would not resign if the next administration asked him to. The Wall Street Journal reported that Powell might also mount a legal challenge to any attempts to oust him before the end of his term.

As for Trump himself, he has recently not indicated any plans to try to force Powell out, stating in June that he would allow Powell to complete his term, "especially if I think he is doing the right thing." The Wall Street Journal reported that Trump's advisors are divided on how far he should go on this issue.

Compared to Trump's previous four-year term in the White House, it may be more difficult for him to make immediate changes at the Federal Reserve, especially since there are no vacant positions on the seven-member board.

Meanwhile, any changes at the Federal Reserve could threaten an effort by policymakers to combat inflation without triggering a broader economic or labor demand collapse. Last week, the Federal Reserve lowered interest rates by 25 basis points and stated that economic activity remains at a "solid pace," but the market remains uncertain about the timeline for future rate cuts.

Some analysts speculate that the policy changes proposed by Trump, particularly the imposition of comprehensive tariffs on U.S. imports, could drive up inflation, leading the Federal Reserve to maintain interest rates at higher levels than initially expected. The Wall Street Journal noted that this volatility increases the likelihood of conflict between the Federal Reserve and the new Trump administration.

Nevertheless, Piper Sandler analysts stated that Trump "seems likely to perform well regarding the independence of the Federal Reserve," and they believe that keeping the Federal Reserve independent would be the "best and easiest choice" for the president-elect to achieve his preference for low interest rates—especially if his policies expand the U.S. federal deficit. A larger deficit could force the government to sell more bonds to finance its debt, potentially pushing up overall borrowing costs.

Piper Sandler analysts stated: "If the new administration is unlikely to reduce the deficit as expected, then adhering to inflation targets and the independence of the Federal Reserve seems to be an effective balance to keep borrowing costs as low as possible."