Cailian Press, June 30th (Editor: Huang Junzhi) – As President Trump repeatedly pressured Federal Reserve Chairman Jerome Powell to cut interest rates without success and publicly criticized him, the market increasingly expects Powell to be replaced by a more dovish “successor” next year. Worse yet, it is possible that Trump will announce a “shadow chairman” before the end of Powell’s term.
Last Wednesday, media sources quoted insiders saying that Trump had considered selecting and announcing a successor to Powell before September or October. However, White House officials later stated that the decision on nominating the next Fed Chairman was not “urgent,” and Trump has the right to change his mind at any time, with many excellent candidates available.
However, the shadow chairman’s shadow still looms over the market, raising concerns about the independence of the Fed.
Alan Blinder, an economist at Princeton University and former Vice Chair of the Fed, recently warned that appointing a so-called shadow Fed Chairman before Powell’s term ends would cause chaos in financial markets and could even lead to resistance against the successor. Wall Street analysts also believe this idea is misguided, potentially causing the dollar and U.S. Treasury bonds to devalue.
Powell’s chairmanship is set to expire in May 2026, and the transition to the new Chairman typically takes about three to four months, meaning the nomination of a successor should ideally occur as early as January next year.
If a new Chairman is nominated before the aforementioned date, theoretically, the nominee might “force” the market to relax financial conditions before taking office, such as lowering bond yields, and weaken the message conveyed by Powell during the last few months of his term.
Moreover, in practice, the outcome could be chaotic.
Blinder, who served as the vice chairman of the Federal Reserve during Greenspan’s tenure, stated that the shadow chairman is “an absolutely terrifying idea” because the market must simultaneously clarify two very different positions.
“If they don’t sing the same song (which seems likely), it will only confuse the market,” he warned.
Notably, Michael Brown, a senior research strategist at financial services firm Pepperstone, expressed in a report that the “shadow chairman” would be counterproductive and create “chaotic policy rhetoric, thereby further weakening policy transmission.”
He further explained that people believe the Federal Reserve will be more politically influenced, which could lead to accelerated outflows of funds from the dollar and US Treasury bonds, driving up interest rates and other borrowing costs.
“Finally, perhaps the most troubling for Trump, given increasing external pressures and the desire to maintain policy independence, all these factors actually make it harder for the Fed to cut rates,” he added.
Blinder also warned that the Federal Open Market Committee (FOMC) is usually driven by consensus, and the “shadow chairman” might cause a “big showdown” during meetings.
“If he or she (referring to the shadow chairman) challenges Powell’s statements, it would anger the FOMC. Because by the time this new chair takes office, almost all members are still in place. This opens the door for open or silent resistance against the Fed Chairman, which is rare in the history of the Fed,” he added.