"Shadow Federal Reserve Chair" Three Major Candidates Emerge: Former Federal Reserve Governor Warsh, Economic Council Director Hassett, and Current Governor Waller.
Written by: Long Yue, Wall Street Insights
Trump is planning an early layout, and the "shadow Federal Reserve chair" is emerging.
According to news from the Wind Trading Desk, Deutsche Bank's latest report indicates that U.S. President Trump stated in response to questions about the next Federal Reserve chair that relevant news may be "announced soon." Although Powell's term as chair does not expire until May 2026, and board seats extend until 2028, Trump may take advantage of the vacancy created by Federal Reserve Governor Kruger's departure in January 2026 to lay the groundwork for a successor.
Deutsche Bank pointed out that Trump may support the "shadow Federal Reserve chair" concept initially proposed by Treasury Secretary Bessent, which involves appointing the next chair well in advance. This strategy reflects the government's emphasis on the discourse power of monetary policy.
As the Trump administration's "Great Beautiful Act" is expected to pass in mid-July, and trade policies may become clearer in the coming months, market focus will shift to the candidates for the next Federal Reserve chair.
Three Major Candidates Each Have Their Own Characteristics, Policy Preferences Are Key
Deutsche Bank's report outlines three potential candidates frequently mentioned by U.S. media:
Kevin Warsh: Served as a Federal Reserve governor from 2006 to 2011 and is currently a researcher at the Hoover Institution. The betting market sees him as the frontrunner, but he has historically held a hawkish stance, criticizing the Federal Reserve's quantitative easing policies and questioning last September's 50 basis point rate cut and the size of the Federal Reserve's balance sheet.
Kevin Hassett: Currently the director of Trump's National Economic Council, but his monetary policy preferences are not yet clear.
Chris Waller: Currently a Federal Reserve governor, he has recently shown more dovish views, suggesting that the Federal Reserve can ignore inflation driven by tariffs and lower interest rates.
U.S. Treasury Secretary Bessent has also been unexpectedly drawn into the "battle." Deutsche Bank mentioned that they have been asked multiple times by institutional clients whether Bessent has the potential to take over the Federal Reserve.
Deutsche Bank Optimistic About Waller's Chances
Deutsche Bank's report indicates that Trump, by calling for "a 100 basis point rate cut to inject rocket fuel into the economy," is likely to lean towards a dovish candidate.
According to Deutsche Bank's AI tool analysis, Waller is the second most dovish official since 2024, second only to Chicago Fed President Goolsbee. Waller has recently publicly advocated for "ignoring tariff inflation and prioritizing rate cuts," directly addressing Trump's demands.
However, the analysis suggests that merely having a dovish inclination is not sufficient. While the candidates considered by the government may all commit to rate cuts, implementing loose policies is the real challenge.
The report states that the new Federal Reserve chair will need to persuade colleagues to adopt a different policy path. Federal Reserve policy requires a majority vote from the FOMC, and Waller, as a current governor, has established a voting coalition, making it easier for him to push for a policy shift compared to external candidates.
At the same time, external candidates, especially those who have criticized the Federal Reserve (like Warsh) or supported economic policies that could raise questions about the Federal Reserve's independence (like Bessent or Hassett), may face greater obstacles.
If Bessent were to become Federal Reserve chair, he would face accusations of being both "referee and player"—having to assess the effectiveness of the fiscal policies he implemented while denying political interference in monetary decisions.
In contrast, Deutsche Bank believes that current governor Waller has a better chance.
New Chair Will Face Independence Test
Deutsche Bank warns that regardless of the final candidate, the market may test the independence of the next Federal Reserve chair and the credibility of their commitment to achieving inflation targets. If the candidate comes from within the government, this challenge may be even more severe.
In the current context, this test may be more daunting: Trump has threatened to fire Powell and has called for significant rate cuts from the Federal Reserve amid strong economic resilience and rising inflation driven by tariffs, providing "jet fuel" for the U.S. economy.
With the current U.S. economic resilience combined with tariff-induced inflationary pressures, market inflation expectations may heat up in advance, and the new Federal Reserve chair must decide whether to maintain the Federal Reserve's hard-won anti-inflation credibility.
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