Who Will Lead the Federal Reserve Next?

The most significant recruitment process in global finance is nearing its conclusion. With Jerome Powell’s term as Chairman of the Federal Reserve set to conclude in May, the race to replace him is intensifying. For global investors, this transition represents a pivotal moment for monetary policy, occurring against a backdrop of political pressure and market volatility.

President Donald Trump is expected to announce his nominee in the coming weeks. The successful candidate will inherit a central bank facing a complex dilemma: navigating internal disagreements on interest rate trajectories while managing explicit demands from the White House for lower borrowing costs. The overriding concern for capital markets is independence. With the President publicly advocating for cheaper money, Wall Street is scrutinising whether the next Chair will uphold the Fed’s autonomy or bow to political expediency.

Leading the pack in the eyes of many traders is Kevin Hassett, a stalwart of conservative economics and the current head of the National Economic Council. Having served as chair of the Council of Economic Advisers during Trump’s first term, Hassett is viewed as a loyalist who has consistently defended the administration's economic record.

However, his potential appointment raises questions about the future mechanics of the Federal Open Market Committee (FOMC). Analysts question whether a staunch ally of the President could command the necessary respect to sway other board members. In a research note, Deutsche Bank economists cautioned that Hassett might struggle to convince policymakers to disregard inflation concerns and cut rates, noting that "other officials might be sceptical of forward-looking arguments that rely heavily on the administration's policies bringing inflation closer to target."

Hassett has sought to allay these fears, telling CNBC that the Fed's independence was "really, really important". He emphasised that "the way you've got to drive interest-rate movements is with consensus based on the facts and the data," suggesting a pragmatic approach to governance.

Re-emerging as a strong contender is Kevin Warsh, a former Fed governor who served from 2006 to 2011. Currently a fellow at the Hoover Institution, Warsh has historically held a "hawkish" reputation, favouring higher rates to curb inflation. However, his recent rhetoric suggests a pivot that aligns more closely with the President’s desire for easier money.

Warsh has called for "regime change" at the central bank, criticising its heavy reliance on lagging data. He has proposed shrinking the Fed’s balance sheet as a mechanism to facilitate lower short-term interest rates—a theory some economists view with scepticism. His connections are also notable; his father-in-law, Ronald Lauder, is a significant donor to the President. Trump recently remarked to the Wall Street Journal, "I think the two Kevins are great," adding that Warsh agrees with the consensus that "you have to lower interest rates."

While the "two Kevins" dominate the headlines, current Fed governor Christopher Waller remains a dark horse. Having met with the President recently, Waller is viewed by some institutional investors as a "more sensible choice", according to Skyler Weinand, chief investment officer at Regan Capital.

Nominated to the board in 2020, Waller lacks the deep personal ties to the President that Hassett and Warsh possess, but his distance from the political fray is viewed favourably by Wall Street. He has recently indicated that there is room to lower interest rates further, aligning with market desires without the baggage of political allegiance. Regardless of the nominee, the final verdict on their suitability will not come from the Senate, but from the bond and equity markets.