After Powell: Will the next head of the US Fed keep the regulator independent?

US President Donald Trump may choose a new Federal Reserve chairman in early fall or even summer - about six months earlier than usual. Trump has repeatedly publicly berated current chief Jerome Powell for his reluctance to cut interest rates. The president's attacks undermine confidence in the central bank and its policies. And Trump's appointee could be hurt by his words and actions even more than Powell. 

In recent weeks, the president has discussed the idea of picking a replacement for Powell and announcing one in September or October, The Wall Street Journal reported Wednesday night, citing people familiar with the matter. One of them said dissatisfaction with Powell could prompt Trump to make the move even earlier - as early as this summer.  

«There is a likelihood that the person who becomes chairman will be nominated in January, which likely means a nomination in October or November,» said CNCB on Friday, June 27, U.S. Treasury Secretary Scott Bessent. Fed Board of Governors member Adriana Kugler's term expires in January, and so Trump will have a window to appoint a new head of the regulator.    

Jerome Powell's term expires in May 2026. Usually the transition period begins 3-4 months before that. And an earlier appointment could allow the future chairman to influence investor expectations about interest rate movements, the WSJ notes.   

The market reacted negatively to the information from WSJ: the dollar index (the exchange rate to the currencies of the countries - major trading partners of the USA) on Thursday fell by 0.7% to the lowest level since the beginning of 2022. The trades ended with a 0.5% decline. The euro was up to $1,174. 

«A candidate who is perceived to be more open to cutting rates in line with Trump's demands would reinforce the current trend of a weaker dollar,» said Lee Hardman, senior currency analyst at MUFG, to the Financial Times newspaper.

The point is to undermine confidence not just in the dollar but in the Fed as a whole, added Elias Haddad, a strategist at Brown Brothers Harriman: «Conflicting signals from the official chairman and the 'shadow' chairman will increase market confusion, create mixed expectations about monetary policy and undermine the Fed's image as an institution not affiliated with either party.»

Trump's action reverses a policy that became truly global when, after a decade of «great inflation» in the 1970s, policymakers in the U.S. and elsewhere gave central banks independence to conduct monetary policy. Now, in almost all developed countries and in many developing countries, central banks decide it «without political interference, approval, or fear of punishment,» wrote President Joe Biden's Committee of Economic Advisers (CEA) (the link to that text on the White House website is now down).

The independence of central banks is «one of the greatest achievements» of the past 50 years, and «anything that would undermine their credibility as inflation fighters risks potential problems,» said Pierre-Olivier Gourinchas, an economic adviser and director of the IMF's research department to the Financial Times.

«Research, theory, and evidence suggest that a central bank's ability to conduct a MPC without political interference is a critical factor affecting its ability to control inflation,» the CES wrote. - A central bank's independence builds confidence in the central bank, which is also key to maintaining long-term, sustainable expectations. When confidence in the central bank is undermined by political influence, people, firms, and other price setters are less likely to believe in its commitment to control inflation, which in turn can cause it to accelerate.»

Prior to the WSJ's publication, during a press conference Wednesday at the NATO summit in The Hague, Trump said of the potential nominee for Fed chairman that he was choosing «out of three or four people.» «I mean, he [Powell] will thankfully be gone pretty soon because I think he's terrible,» the president added.

According to WSJ sources, Trump is considering former Fed Governor Kevin Warsh, National Economic Council Director Kevin Hassett, and Treasury Secretary Scott Bessent. Other contenders include former World Bank President David Malpass and current Fed Governor Christopher Waller.

Warsh is considered one of the top candidates. Earlier this year, Trump discussed him to replace Powell even before the end of the current chairman's term, and late last year considered him as a contender for Treasury secretary. At a closed-door meeting of financiers in June, Warsh told the audience, according to a recording available to the WSJ, «I wouldn't be shocked if the president makes a nomination earlier than usual, just to.... try to make the 'lame duck' more lame or something like that.» A «lame duck» is usually referred to as an executive with expiring powers.

Against Worsh (from Trump's point of view) plays the fact that he is considered a «hawk», that is, of the two goals of the Fed - limiting inflation and maintaining employment - he cares more about the former. 

Hassett told WSJ sources that he is not interested in the Fed chair position. 

According to people close to Bessent and Trump, the Treasury secretary is enthusiastic about the possibility of becoming Fed chairman and has not ruled it out in private conversations. In early June, he told congressmen, «I'm happy to do what President Trump wants me to do.»

A close relationship with the president could help Bessent get the job. In 2018, when Trump nominated Powell, he barely knew him. According to people familiar with the matter, Trump doesn't want to repeat the «mistake» of picking someone who won't be fully committed to him.

Malpass, whom Trump nominated to head the World Bank, and Waller caught the president's attention, in part, by recently advocating for lower interest rates. Waller was the first sitting governor to support such a move. The easing of the MPC, in his view, could be accomplished as early as the July meeting. In a interview with CNBC on June 20, he warned of the risks of keeping rates high for too long: «We've been holding the pause for six months now, thinking there would be a big inflationary shock because of the [import] duties [imposed and proposed by Trump]. We haven't seen it.»

Powell is taking a more cautious stance. Seeing that during several years of high inflation, companies have learned to pass on the increased costs to consumers, he and other governors want to make sure that it will not now be spurred on by the new duties. It should take at least a few months for their effect to begin to show. In addition, the increased duties announced in April for dozens of countries Trump postponed until July 9. If ongoing negotiations with other countries do not result in new trade agreements, the entry into force of these duties will create additional inflationary pressures;

«If we make a mistake here, people are going to be paying for a long time,» said Powell on Wednesday at a Senate Banking Committee hearing. - The question is who will pay for the duties. How much will it affect inflation? Frankly, it's very difficult to predict that in advance.» 

A rate cut this year, he said, is possible, but «our approach will be cautious.»

Trump called for a 2.5 percentage point rate cut. The Fed has kept them at the level of 4.25-4.5% since the beginning of the year. Most managers expect a 0.5 percentage point cut by the end of the year.

Trump attacked Powell both in his first term and during the campaign. In April 2025, Trump called Powell a «big loser» and «Mr. 'Too Late'» for refusing to immediately cut rates to help the economy survive the trade war he launched. Following these remarks by the president, the WSJ had a article titled «The Real Loser May Be Trump's Next Appointee for Fed Chair.» 

Trump's demands could undermine investor confidence in the next chairman, economists and people involved in the conduct of US economic and monetary policy told the newspaper. Market participants will wonder whether the head of the U.S. central bank is consulting the president on rates, thus killing the regulator's independence. 

«You can't denigrate a person in this way and then expect the market to have incredible confidence in whoever you choose to replace them,» commented John Silvia, president of consulting firm Dynamic Economic Strategy and former chief economist of the Senate Banking Committee.

Trump's attacks «will no doubt cast a shadow of suspicion on the next chairman,» assured David Wilcox of Bloomberg Economics and the Peterson Institute for International Economics. He previously headed the research and statistics division of the Fed's Board of Governors and also worked at the U.S. Treasury Department. The market, in his opinion, will «almost certainly» believe that since Trump was dissatisfied with the previous chairman's JCP, the new one will try to give him every reason to be satisfied;

Even if the executive branch cannot force a central bank to implement a particular policy, the pressure it exerts still undermines the central bank's credibility and reduces the effectiveness of its actions, Francesco Bianchi, an economics professor at Johns Hopkins University, and colleagues have shown. According to their study «Threatening Central Bank Independence One Tweet at a Time,» based on data during President Trump's first term, the president's tweets criticizing the Fed had a noticeable impact on federal funds rate futures quotes. 

The average effect across all contracts with different maturities was about minus 0.25 basis points, and the cumulative effect was minus 10 bps. «This is significant given that the typical rate change is plus or minus 25 bps,» the study said. - There is clear evidence that President Trump's tweets are lowering market expectations [about the level of the rate].» 

Moreover, this effect grows over time, amounting to minus 18.5 bps for the furthest contracts. From this, economists conclude, «Markets believe that President Trump is persistently influencing the conduct of the MPC, rather than simply inducing changes in the timing of MPC decisions.» This raises market expectations of a rate cut, so even if Trump doesn't directly influence Fed decisions, his pressure could still indirectly influence the MPC. After all, the Fed closely monitors market expectations and takes them into account when making decisions, the study said.

Public attacks on the Fed and demands for lower rates could have the opposite effect, Lawrence Summers, former Treasury Secretary under Bill Clinton from 1999-2001, told the WSJ. He said «the Fed will not listen, and if it does, it will feel the need to prove its independence,» which means keeping short-term rates at current or even higher levels than it could in the absence of outside pressure;

At the same time, Summers said, the market will «definitely listen, get nervous, which will lead to higher long-term rates» because of expectations of higher inflation and rising Treasury yields. After all, the market will listen to what the president says about rates, not the head of the central bank, which has lost its independence;

This article was AI-translated and verified by a human editor