Donald Trump’s search for a new chairman of the Federal Reserve seemed to reach a conclusion last week – at least until Wall Street lobbying against his presumed choice put the announcement on ice.
At a White House event on Tuesday, the president appeared to anoint Kevin Hassett, his current chief economic adviser, whose probability of being selected soared to 70% on the Polymarket betting site, up from 15% a week earlier.
But yields on US Treasury bonds quickly rose on fears that Hassett would be soft on inflation, and prominent financiers reportedly complained in private to treasury secretary Scott Bessent. Now it seems that no final decision will be made until early next year. By Friday, Hassett’s Polymarket probability had plunged below 8%, making him only a slight favourite for the job.
Trump hates the independence of America’s central bank, especially its current refusal to cut interest rates as fast as he would like to boost the economy. He wants to replace the current chairman, Jerome Powell, whom he regularly insults on social media, with someone more obliging.
His pick will have profound implications for the average American. One tribe of Fed officials, mostly Trump appointees, are raising the spectre of a slowdown in the US job market and are calling for more aggressive rate cuts, following an expected quarter-point cut next week.
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Another tribe, mostly regional bank governors, fears resurgent inflation, and the impact that cutting too fast could add to the froth in equity markets.
Hassett’s loyalty to the president is not in doubt. His instincts are. Despite a conventional economist background, he has made outlandish and erroneous predictions about the impact of Trump’s tax cuts on American wallets and on projected deaths from Covid-19.
Even out of office, he has been overly optimistic in circumstances where hard-nosed realism, not boosterism, would be expected of a Federal Reserve chair. In 1999, he wrote a book arguing that US shares were greatly undervalued, at a time when the then Fed chair, Alan Greenspan, was rightly worried that “irrational exuberance” was driving a stock market bubble.
Whoever is chosen will have had to pass a presidential loyalty test, a higher bar since Powell proved more independent than expected after Trump picked him in 2018. But Wall Street would be happier with a choice who has shown more respect for central bank independence than Hassett, such as second-favourite Kevin Warsh, a former Fed governor.
Warsh, like the other leading candidates, has been aligning himself with Trump publicly, criticising the Fed’s record under Powell and talking up the potential for artificial intelligence to drive a surge in US economic productivity. Another of the favourites, Christopher Waller, who has generally shown respect for the institutional norms of the Fed as a sitting governor, has broken ranks with his colleagues by voting more aggressively for interest rate cuts.
Yet another candidate, Rick Rieder, chief investment officer at investment giant BlackRock, would be welcomed by Wall Street for his deep knowledge of the bond market, and has been supporting Trump's calls for rate cuts by arguing they are needed to boost a weakening labour market. As for treasury secretary Bessent, he probably considers it too soon to leave a job he lobbied hard to get.
The new chair won’t necessarily find it easy to do Trump’s bidding, as interest rates are set by a majority vote of the 12-member Federal Reserve Open Market Committee. Trump is trying to stack that committee with loyalists – though his firing of one member, Lisa Cook, for alleged mortgage fraud remains blocked in the courts. Powell faces growing pressure from the Wall Street establishment to stay on the committee after he steps down as chair in May.
After a bruising innings, Powell is believed to want to return as fast as possible to the private sector, but his committee term, as a Fed governor, does not expire until January 2028. To preserve central bank independence, which all sound evidence shows is good for the economy in the long term, Powell may need to stay on to fight, whoever is his successor.