Investors focus on Fed independence as chair decision looms

When it comes to your money, the chair of the Federal Reserve has more power than you might think.

• Credit cards? Check.
• Student loans? Check.
• Auto loans? Check.

Then there’s the impact on mortgage rates, your stock portfolio, and regulation of the nation’s banking industry. 

Add the U.S. money supply and the interest on the nation’s debt, and well, you get the picture.

So beyond the interest rates on your household and/or business bills, and the returns on your retirement fund, the Fed chair has a really big job: If the U.S. economy messes up, it’s up to the Fed chair to fix it.

And it’s a role that theoretically executes data-driven monetary policy without political influence dictated by partisan executive powers that be. 

Economists, traders, and Fed watchers all agree that there has always been some political fallout floating through the central bank’s independence.

But overt demands from the White House to do its bidding? Take a look at the Truman and Nixon administrations and the disastrous economic fallouts that took years to mitigate.  

President Trump to name Fed chair nominee

President Doland Trump is expected to name the next chair to replace his chosen nemesis Jerome Powell very soon. 

That announcement could come by the end of this week, before the president leaves for the World Economic Forum’s annual meeting held Jan. 19-23 in Davos, Switzerland.

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The president, who has been demanding lower interest rates since his second term began, commented in a robust Truth Social post last month. “Anybody that disagrees with me will never be the Fed Chairman!”

President Trump declined to name the nominee during a mini-marathon interview with The New York Times on Jan. 7. “I have in my mind a decision…I haven’t talked about it with anybody,” he said.

"The Two Kevins" are top finalists

When pressed by The Times specifically about National Economic Council Director Kevin A. Hassett, the president said, “I don’t want to say.” 

He added that the long-time Trump loyalist and conservative economist was “certainly one of the people that I like.”

Related: Next Fed chair faces ‘no-win’ test as White House pushes rate cuts

Treasury Secretary Scott Bessent, who conducted the search after declining the role himself,  said Jan. 8 that there were four finalists.

Note that the running joke among Fed watchers is that there is a 50 percent chance the next Fed chief will be named Kevin.

Former Fed Governor Kevin Warsh, who has been praised publicly by the president during the search process, is also seen as a favored candidate for the nomination. 

Trump told The Wall Street Journal Dec. 12 that he was leaning toward choosing either Warsh or Hassett.

Warsh has a 45% chance of being the nominee, followed by Hassett at 36% and current Fed Governor Christopher Waller at 11%, Kalshi posted on Jan. 11.

Why are investors liking Warsh?

Warsh served as a former Fed governor from 2006 to 2011, and he was once praised by then-Chair Ben Beranke for his deep ties to Wall Street. 

• Warsh resigned from the Fed in opposition to Beranke’s bond-buying programs.
• Since then, Warsh has been a vocal critic of the central bank, calling for a “regime change.”
• Reuters reported last month that Warsh enjoys close connections to President Trump’s circle. 

There’s the thought that the market would see Warsh as less of an ally to Trump; Warsh could steer the central bank away from purely partisan actions and be less likely to respond to White House orders and expectations.

Hassett’s MAGA-first reputation has spooked some traders as well as economists, according to investors.

Investors favor Waller, but his prospects of becoming the next Fed chair are likely limited by his commitment to independence and lack of a close relationship with the president, unlike Hassett and Warsh.

Trump’s expectations of the next Fed chair

The Fed chair is only one of 12 votes on the policymaking Federal Open Market Committee, which sets the benchmark Federal Funds Rate. 

So the president’s stated goal of immediately slashing interest rates to 1% or lower (they are currently at 3.50% to 3.75%) could be outside the purview of the new chair who takes over when Powell’s term ends in May.

The president has also made it very clear that he wants the next chair to listen to his views on the economy and then execute his agenda not only on monetary policy, but also on the Fed’s $6.7 trillion balance sheet and deregulation of the banking industry.

• Fed reform has long been a mantra of Bessent, who has used his position to preach this cause to investors and businesses, many of whom agree that the central bank needs an overhaul. 
• The fork in the road is how to execute that strategy without damaging the U.S. economy.

In short, the next chair is looking at a complex and challenging situation.

What experts are saying about the Fed chair nomination

“The Fed is widely viewed as the anchor of stability for the entire U.S. economy — the entire global economy, in fact,” Alan Blinder, a Princeton economist who previously served as the second-highest-ranking member of the Federal Reserve, told The Atlantic in a Jan. 7 interview.

“So if the Fed starts acting erratically, that’s a recipe for all kinds of market volatility,” Blinder, a Fed historian, said.

As The Atlantic reported, other economists argue that Hassett might have to parrot Trump’s talking points to nail the job, but once he has it, he will be free to make his own independent decisions.

Then his training as a mainstream economist with a Ph.D. in economics from the University of Pennsylvania “will kick back in.”

The next FOMC meeting is coming up

The FOMC meets eight times a year to decide whether to raise, lower, or hold interest rates in accordance with its congressional dual mandate of maintaining low unemployment and stable prices.

• As we’ve reported, a very divided FOMC is headed into its Jan. 28 meeting with an expected historic streak of dissents: Tensions are rising amid its dual mandate — a cooling labor market and sticky inflation. 
• The CME Group FedWatch Tool predicts a less than 5% chance of a rate cut this month.

Related: Fed split deepens as Miran calls for 1.5-point rate cut