"Analysis" Trump plans to decide on the Federal Reserve Chair candidate in advance, a move that may unsettle the market

Investors worry that a "shadow" chairman may lead to policy confusion

Wall Street believes the independence of the Federal Reserve is crucial

Powell's term will end in late May 2026

New York, June 18 - U.S. President Trump stated that he will soon nominate a successor to Federal Reserve Chairman Jerome Powell, while there is still nearly a year left in Powell's term. Investors indicate that this could pose risks to the market.

Trump has not hidden his dissatisfaction with Powell and the Federal Reserve, as the Fed has not cut interest rates since he began his second term in January. Although Trump retracted earlier comments about possibly firing Powell, a recent ruling by the U.S. Supreme Court has eased concerns about him potentially dismissing Powell, but he indicated earlier this month that he would decide on the next Federal Reserve chairman soon.

Powell's term will end in May 2026, and investors say that announcing a successor before then could cause significant market unease.

There may be a "shadow" chairman at the Federal Reserve whose views on monetary policy could differ from those of the current Fed leadership, which could lead to confusion. Given the widespread belief that the Fed's independence is vital for its normal operation, any candidate perceived to be under Trump's control would raise concerns on Wall Street.

Eric Winograd, Chief U.S. Economist at AllianceBernstein, stated, "Whoever is appointed, the key is to observe whether they are seen as politically appointed. I mean those whose views may change with the president's whims."

The Federal Reserve chairman is responsible for setting U.S. monetary policy and is tasked with maintaining full employment and price stability, making them one of the most closely watched government officials on Wall Street. That said, the Fed chairman is only one of the 18 members of the central bank's monetary policy committee, one of whose responsibilities is to build consensus within the committee.

Callie Cox, Chief Market Strategist at Ritholtz Wealth Management, stated that the market hopes the Fed chairman will be "fully focused on" economic balance and their dual responsibilities.

"Any Wall Street manager would tell you that the independence of the Federal Reserve is the golden rule of the market," Cox said. "Deviating from this rule could trigger a series of problems."

Jason Draho, Head of Asset Allocation for UBS Global Wealth Management Americas, stated that if an unconventional successor to Powell is announced in the coming months, it could introduce potential variables for the market.

He said, "If people are too complacent about how things are progressing, then there is a risk."

According to the online prediction market Polymarket, the most popular candidates to succeed Powell are National Economic Council Director Kevin Hassett, former Fed Governor Kevin Warsh, Judy Shelton (who was nominated by Trump to be a Fed governor but had her nomination withdrawn during President Biden's term), and Treasury Secretary Scott Bessent Another forecasting website, Kalshi, lists current Federal Reserve Governor Christopher Waller as one of the most likely candidates for appointment.

The White House declined to comment on the potential candidacies of Hasset or Bessent. A Federal Reserve spokesperson had no comment. Shelton referenced her earlier comments on the Federal Reserve published in The Wall Street Journal in an email reply. A request for comment from Waller has not yet been responded to.

Shadow Chair

Investors are concerned that the early appointment of a Federal Reserve Chair could lead to confusion in monetary policy messaging. Ryan Sweet, Chief U.S. Economist at Oxford Economics, stated, "There will be two people trying to steer the ship: one is actually at the helm, and the other is a backseat driver."

Investors noted that the appointment of the Federal Reserve Chair requires approval from the U.S. Senate, and this process could take months from the time Trump announces the appointment.

Alex Grassino, Global Chief Economist and Head of Macro Strategy at Manulife Investment Management, mentioned that although the market "dislikes" the idea of a shadow chair at the Federal Reserve, understanding the shadow chair's track record in responding to data and policy "will increase your familiarity with their communication style."

BCA Research strategist Felix Vezina-Poirier stated that the best market reaction to the Federal Reserve Chair nomination might be no reaction at all, adding that he would pay particular attention to the bond market's response. He said, "No reaction, or a decline in long-term yields, would be a good sign, indicating that the market is digesting the news about the Federal Reserve candidates."

Some investors believe that Trump will not quickly nominate Powell's successor but will wait until the Federal Reserve Chair's term is nearing its end.

Other investors indicated that the final nominee may not be among those currently rumored or predicted.

Winograd from Invesco stated, "If I had to bet, I would bet on someone not on the list."