Trump may name a ‘shadow' Fed chair, an unprecedented development in American history

CNN

6 days ago

President Donald Trump said last week that he will announce his pick to succeed Federal Reserve Chair Jerome Powell 'very soon.' The problem is that Powell still has 11 months left until the end of his term.
Trump remains frustrated as ever with the Fed because it has not yet lowered interest rates. He has relentlessly attacked Powell for months. But announcing a Fed chair nominee this far in advance — if he makes good on that plan — would be an unprecedented development in the central bank's 111-year history.
This person would effectively be acting as America's 'shadow' Fed chair — a proposal Scott Bessent first floated last year before he became Trump's Treasury secretary. Such an extraordinary move could undermine the current Fed chief and intensify the uncertainty that has bedeviled the US economy since Trump took office, former Fed officials and academics tell CNN.
'It's an absolutely horrible idea,' Alan Blinder, who served as the No. 2 official at the Fed during the mid-1990s, told CNN in a phone interview.
Blinder said a shadow Fed chair would mean markets would have to make sense of two influential voices speaking about monetary policy at the same time, but offering potentially very different visions.
'If they're not singing from the same playbook, which seems likely, this is just going to cause confusion in markets,' said Blinder, a former Clinton economic adviser who is now a professor at Princeton University.
Greg Valliere, chief US policy strategist at AGF Investments, expressed a similar sentiment in a note to investors on Thursday: 'This is a terrible idea, sure to annoy and confuse financial markets if there are two Fed Chairs.'
'It all depends on just how loyal this person is expected to be to Trump,' said Kathryn Judge, a professor at Columbia Law School who researches financial markets and central banking. 'But we don't we know what the ramifications would be or what they'd be willing to do, because this is unprecedented.'
US presidents have historically waited until the final months of the incumbent Fed chair's term before naming a successor.
RSM chief economist Joe Brusuelas cautioned that naming an early Fed chair could backfire, causing a jump in the very interest rates Trump is seeking to drive lower.
'Undermining Powell is in no one's best interest as it will almost certainly translate to a weaker dollar and rising rates,' Brusuelas said.
On Wednesday, the Wall Street Journal reported that Trump, frustrated by Powell's reluctance to slash interest rates, could announce his nominee as early as this summer.
The US dollar index, which measures the dollar's strength against six major foreign currencies, subsequently illustrated investors' discomfort with the idea of a shadow Fed chair. After the Journal's report, the US dollar was down 0.3% Thursday morning and hovered around its lowest level since February 2022.
The stock market, in contrast, appeared largely unfazed by the idea of Trump naming a shadow Fed chair. US stocks moved solidly higher on Thursday, flirting with record highs.
Valliere worries the plan for naming an early Fed chair 'would politicize the Fed for a few months before stability is restored next May.'
'The damage to the Fed's independence would be considerable if Trump becomes a monetary back-seat driver, second-guessing Fed policies this fall,' Valliere said.
There are at least three contenders for the top job at the Fed, CNN has previously reported: Bessent; Kevin Warsh, a former Fed governor; and Christopher Waller, a current Fed governor. The Journal reported that Kevin Hassett, the director of the White House's National Economic Council, is also being considered; as well as David Malpass, who Trump in his first term nominated to helm the World Bank.
Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis who is now a professor at the University of Rochester, told CNN that a shadow Fed chair is 'not great policy' because the person could step on Powell's current messaging.
'However, it might be better than having the president tweet about monetary policy,' Kocherlakota said, alluding to Trump's intensifying attacks on Powell via social media.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told CNBC on Thursday that the naming of a new Fed chair this far in advance would have 'no effect' on Fed policymakers.
One former Fed official who sat on the rate-setting committee alongside Powell also stressed that naming a shadow Fed chair would not sway policymakers.
'I can tell you with absolute certainty it will have no impact on Jay Powell and the existing FOMC,' this former official told CNN on the condition of anonymity, referencing the Fed's 12-member voting committee.
The former Fed official said some candidates Trump is considering may have second thoughts about getting announced this early in the process.
'I wouldn't want to be named at this juncture because you'd be saying I am Trump's lackey. That would hurt my credibility on the Street and in Corporate America,' the former official said.
As Goolsbee alluded to, a shadow Fed chair won't have any real power before assuming the role. Trump's pick would also need to be confirmed by the Senate, though that likely won't be much of an obstacle with Republicans controlling both chambers of Congress through 2026.
Even then, it won't be easy for this person to bend the Fed to their will. All monetary policy decisions are voted on by the FOMC, also known as the Federal Open Market Committee. The chair cannot unilaterally veto what the members vote for and, in theory, could even be outvoted.
Blinder, the former Fed vice chair, said the risk is that a shadow Fed chair provokes their future colleagues by speaking out before taking power.
'If he or she contradicts what Powell is saying, that will aggravate the FOMC, almost all of whose members will still be there when the new chair takes over,' Blinder said. 'It opens the door to an open or silent revolt against the chair, which is a rare thing in Fed history.'
CNN's John Towfighi contributed to this report.