The conventional wisdom had long been that it would be one of the “two Kevins.” At least, that was the prevailing impression in much of Wall Street and Washington when it came to President Donald Trump’s choice for the next chair of the Federal Reserve.
Trump had for months hinted that he wanted to appoint Treasury Secretary Scott Bessent to the role, but Bessent continued to turn down the offer.
That left Kevin A. Hassett, a longtime Trump loyalist and his economic adviser, and Kevin M. Warsh, a former Federal Reserve governor who came close to landing the job during Trump’s first term, as the leading contenders to succeed Jerome H. Powell in May.
The decision centers on whom Trump believes would be most capable of delivering a significant reduction in borrowing costs — an objective he repeatedly failed to extract from the Fed under Powell. Trump, who elevated Powell to the chairmanship in 2017, appears to remain haunted by that decision and has made clear that this time he wants someone more receptive to his guidance.
That requirement, however, creates a credibility problem for whoever is chosen — one that is difficult to escape. A chair perceived as being beholden to the US president risks undermining public confidence that the Federal Reserve makes decisions in the interest of the economy rather than the White House. And if that confidence erodes, borrowing costs could rise instead of fall, contrary to what the president wants.
“Anyone who gets the job is damaged goods,” said Andy Laperriere, head of US policy research at Piper Sandler.
Laperriere added: “Either you’re the person who delivers what the president wants, which won’t look great in the history books, or you’re the person who doesn’t deliver what the president wants, and then he’s likely to turn on you.”
A race toward the finish line
Until a few weeks ago, Hassett, director of the National Economic Council at the White House, was seen as the frontrunner for the role.
But Trump’s announcement this month that he would wait a bit longer before making a final decision added more drama to the prolonged “audition” process. His praise for Warsh last week following a meeting between the two confirmed that the race is far from settled.
Trump is scheduled to meet Wednesday afternoon with Christopher J. Waller, a Federal Reserve governor he appointed in 2020. Waller, who previously served as chief economist at the St. Louis Fed before moving to Washington, is widely viewed as a strong defender of the institution’s independence. That trait makes him a favorite on Wall Street, but at the same time reduces his chances of securing the job. In a moderated discussion Wednesday morning, Waller said there remains room for the central bank to cut interest rates given that the labor market is “quite weak,” but added that there is “no urgency” to do so.
Recent weeks have put Hassett on the defensive, as he has been forced to address growing concerns about his closeness to the president. In an interview with CBS News on Sunday, Hassett, who holds a PhD in economics, said he would listen to Trump’s views on interest rates, but that the president “would have no weight” in decision-making.
Critics argue that Hassett’s close relationship with Trump creates a perception problem that is difficult to overcome. They point to the rise in long-term US Treasury yields since Hassett emerged as the leading candidate in late November as a sign of Wall Street unease. Yields rise when prices fall, indicating weaker investor appetite for holding bonds.
As that narrative has taken hold, Warsh has begun to attract support from influential voices, including JPMorgan Chase CEO Jamie Dimon, who said at a private event last week that Warsh would be a “great chair,” while stressing his respect for both Kevins.
Warsh, who served as an economic adviser to former President George W. Bush and has deep ties to Wall Street, nonetheless faces his own challenges in securing the position.
His call for lower interest rates is relatively recent. As recently as last year, he was warning about a resurgence of inflation and criticized the central bank for what he described as “stimulating” the economy by signaling rate cuts.
That caution reflected Warsh’s views during his tenure as a Fed governor from 2006 to 2011. Even at the height of the global financial crisis, he repeatedly raised concerns about inflation. His opposition to the Fed’s efforts at the time to support the economy through trillions of dollars in government bond purchases ultimately led to his resignation.
Warsh has previously described the Fed’s independence as “precious.” Since then, he has linked rate cuts to a reduction in the central bank’s balance sheet, arguing that shrinking the Fed’s footprint in financial markets — a move likely to push up long-term borrowing costs — would give policymakers room to cut short-term rates. That approach, however, may not be enough to satisfy Trump.
“It really is a no-win scenario for those involved,” said Gennadiy Goldberg, head of US rates strategy at TD Securities. “Either you have credibility concerns, or you get someone more credible and less loyal.”
White House spokesman Kush Desai said in a statement that Trump is “committed to nominating the best and most qualified person to reverse the economic disaster left by Biden.”
A divided Federal Reserve
The next chair is also likely to face resistance from within the Federal Reserve itself. Interest rate decisions have already become deeply divided, reflecting the complexity of the economic backdrop.
Any attempt to push rates lower than economic conditions warrant would likely encounter opposition from other members of the Federal Open Market Committee, which consists of seven governors, the president of the New York Fed, and four of the remaining twelve regional Fed presidents on a rotating basis.
Blake Gwinn, head of US rates strategy at RBC Capital Markets, said he expects more fragmented votes going forward, including the possibility that the chair could find himself in the minority.
“A new chair can’t go into his first meeting and not dissent if the vote is to hold rates steady,” Gwinn said. “And if he votes with the majority to keep rates unchanged, Trump will go crazy.”
That dynamic could complicate the Fed’s ability to clearly communicate its policy intentions and could ultimately backfire on the president himself, Gwinn added.
“If we get into next year with him forcing rate cuts, the irony is that he may see all the interest rates he cares about go higher,” he said.
The next test
Rising concerns about the Fed’s future have not gone unnoticed by the administration. On Tuesday, Bessent praised both Kevins, saying each was “highly qualified.”
“The idea that people don’t have independence and can’t make decisions for themselves is wrong,” Bessent told Fox Business. He added, however, that what the next chair needs is an “open mind,” particularly toward the idea that “growth does not create inflation.”
Such reassurances may have been enough to calm nerves during Trump’s first term. But his aggressive efforts to pressure the Fed since returning to the White House — including an attempt to remove one governor and his statement that he “would like” to fire Powell — have heightened concerns about how far he might go to exert control over the institution.
The Supreme Court is set to consider in January whether Trump can remove Lisa D. Cook, the governor he has placed in his crosshairs. Legal experts warn that the outcome of the case could have far-reaching implications for the Fed’s ability to operate independently.
Powell, for his part, has so far sought to ignore the president’s attacks, repeatedly saying he is focused on doing his job. That has raised expectations about how the next Fed chair will handle a barrage of criticism from Trump, according to Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
“Will the next chair be as even-keeled as Chair Powell, able to brush off criticism and make decisions in the best interest of the economy and the public?” Zentner asked. “That is the real test of a Fed chair — not the ability to please the president.”
