Analysis-Early Fed chair nomination could rattle markets

By Lewis Krauskopf NEW YORK (Reuters) -U.S. President Donald Trump has said that he would soon nominate Jerome Powell’s successor, with nearly a year left before the Federal Reserve chair’s term ends. Investors said that could present a risky proposition for markets. Trump has made no secret of his displeasure with Powell and the Fed for not lowering interest rates since the president began his second term in January. While Trump has backed off from comments earlier this year that he could fire Powell, and a recent U.S.

Supreme Court ruling eased worries that he could do so, he said earlier this month that a decision on the next Fed chair would be coming soon. Such an announcement, well before Powell’s term ends on May 2026, could cause significant unease in markets, investors said. The potential for a "shadow" Fed chair who offers potentially clashing views with the sitting central bank leader on monetary policy could sow confusion. Any choice deemed as being under Trump’s thumb would alarm Wall Street, given the broad sentiment that an independent Fed is critical to its ability to function properly. "Whomever is appointed, the key thing to monitor is whether they are perceived as being a political appointee," said Eric Winograd, chief U.S.

economist at AllianceBernstein (NYSE:AB). "And by that, I mean someone whose views change with the whims of the president." The chair of the Fed, which sets U.S. monetary policy and has a mandate to maintain full employment and price stability, is among the most closely followed government officials by Wall Street. That said, the Fed chair is only one of 18 members on the central bank’s monetary policymaking committee and part of the role is to build consensus on the committee. Markets will want a Fed chair who is "laser focused" on economic balance and its dual mandate, said Callie Cox, chief market strategist at Ritholtz Wealth Management.

"Any Wall Street manager would tell you that Fed independence is the golden rule of markets," Cox said. "To move away from that can introduce a whole host of issues." An unconventional choice for the Fed would present a potential wildcard for markets if announced in the next few months, said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. "It’s a risk that exists if people are too complacent on how this could all play out," he said. The Fed has no open spots that Trump could fill temporarily until January when Adriana Kugler’s term on the Board of Governors ends. According to online prediction market Polymarket, the top candidates are White House economic adviser Kevin Hassett; former Fed Governor Kevin Warsh; Judy Shelton, a former Trump pick for the Fed board whose nomination was withdrawn under President Joe Biden; and Treasury Secretary Scott Bessent.

Another prediction site, Kalshi, lists current Fed Governor Christopher Waller as having among the best odds to be nominated. The White House declined to comment on Hassett or Bessent as possible contenders. A Fed spokesperson declined to comment. In an emailed response, Shelton pointed to her opinion piece about the Fed earlier this week in the Wall Street Journal. A request for comment from Warsh was not immediately returned.

SHADOW CHAIR Investors worry that an early Fed chair appointment could lead to confusing messages about monetary policy. "You’re going to have two people trying to steer the ship: One that’s actually steering it, and one that’s the backseat driver," said Ryan Sweet, chief U.S. economist at Oxford Economics. For months, Trump has hammered Powell, whom the president himself appointed in 2018, over the Fed’s decision not to lower interest rates this year. The central bank cut the fed funds rate by a full percentage point last year, with its most recent cut of 25 basis points in December.

But the Fed has pointed to risks of both higher inflation and higher unemployment in keeping the rate at its current level of 4.25-4.5%. Just last week, Trump slammed Powell over the lack of rate cuts, calling him a numbskull, but said, "I’m not going to fire him." A Fed chair would need to be confirmed by the U.S. Senate, a process that could take months from the time of Trump’s announcement, investors said. While markets would "not love the idea" of a shadow Fed chair, having a track record of reactions to data and policy "increases the level of familiarity that you would have with their communication style," said Alex Grassino, global chief economist and head of macro strategy at Manulife Investment Management. "You’re sort of setting up an alternate version of what you think policy should be." The optimal market reaction to any Fed chair nomination may be none at all, said Felix Vezina-Poirier, strategist for BCA Research, adding that he will be watching how bonds respond in particular.

"No reaction, or a decrease in long-term yields, would be a good sign that the market is digesting the Fed candidate," he said. Some investors doubted that Trump would name a Powell replacement anytime soon, instead waiting until closer to when the Fed chair’s term ends. The eventual nominee may not be among those most publicly rumored or predicted at the moment, investors said. "If I were betting, I’d bet other," Winograd said. "I’d bet the field."