The Future Of Fed Independence Looks Bleak

As much as I am loathe to, and as much as we run the risk of falling into the trap of just talking about whatever President Trump wants us to, it seems that we need to discuss the Federal Reserve. Particularly, Chair Powell’s future, and whatever may come after him.

There are two issues at stake here, with Powell’s term as Chair due to finish in May 2026, and it seeming almost certain that Trump won’t re-appoint him.

Firstly, though, let’s recognise that, in the last 7 years, Powell has dealt with a huge funding squeeze, the pandemic, 4-decade high inflation, regional banks crumbling, a ‘soft landing’, and now a global trade war. Barring the QT ‘autopilot’ misstep right at the start of his term, I’d argue he’s done a damn good job.

J-Pow Is Going Nowhere

Still, whatever successes I think Powell has had, Trump clearly doesn’t share that view. As a real estate developer, Trump is a lifelong fan of as low an interest rate as possible. That Powell hasn’t delivered additional rate cuts is, hence, a significant point of consternation for Trump, who has in recent remarks noted how Powell is “always late and wrong”, and that his termination “cannot come soon enough”. Trump’s calls for cuts to the fed funds rate have also grown, with comparisons to the ECB’s easing cycle having also been drawn more frequently. Rather obviously, the more remarks of this ilk Trump makes, the less likely it is those policies are delivered, as officials seek to preserve their independence.

Setting aside the fact that the man in the Oval Office clearly has no comprehension of how monetary policy works, the obvious issue is whether Trump could oust Powell from his post before his term expires.

The short answer here, is no. While various legal cases are currently being pursued regarding other independent Federal organisations, it remains the case that Fed Governors are unable to be dismissed other than “for cause”, generally seen as a term covering illegal activities or gross incompetence. Of course, Powell could simply be asked to leave his post by the President, though the Chair has been clear that he will not leave post before his term comes to an end.

Furthermore, even if Powell were – somehow – to be removed from his post as Fed Chair, he would remain a Governor, thus retaining his seat on the FOMC. Given that the FOMC has the ability to elect its own Chair, the other Governors would almost certainly elect Powell to remain at the helm of the Committee, thus continuing (effectively) in his current role.

Next Chair; When > Who

Given the incredibly slim likelihood of Powell being removed before the end of his term, the second and more important issue is that of who succeeds him as Chair, next May.

Treasury Secretary Scott Bessent will manage the process of finding Powell’s replacement, with Bessent having noted in recent media interviews that recruitment for the role will likely begin in the autumn.

It is, right now, tough to whittle down the field into a ‘shortlist’ of candidates for the role, though a few names do spring to mind. Fed Governor Christopher Waller, appointed by Trump during his first term, seems to have been pitching for the job recently, with some uber-dovish remarks around how larger tariffs would necessitate larger, and faster, rate cuts. Meanwhile, former Fed Governor Kevin Warsh is a name who has long been linked with the Chairmanship, as has that of current NEC Director Kevin Hassett. There is also the possibility of a ‘left-field’ pick, such as a ‘Trump-friendly’ economist from the sell-side.

In any case, while the nominee for Chair must be confirmed by the Senate, Congress doesn’t appear right now to be in a position where lawmakers are either able, or willing, to pushback on any aspect of Trump’s agenda. Hence, whoever Trump/Bessent pick is almost certain to be confirmed, and is also almost certain to be a ‘yes man’, acting on whatever those two ask, or demand, he does.

Perhaps of more importance than the identity of the next Chair, though, is when that nomination is made.

Bessent has, in numerous remarks, previously floated the idea of a ‘shadow’ Fed Chair. This would work by the Administration announcing Powell’s replacement, say, six months in advance of Powell’s term ending, and then encouraging the incoming Chair to make as many public remarks in speeches, and media appearances, as physically possible, with the new Chair potentially also offering forward guidance along the lines of ‘in my first FOMC meeting, we will XXXX’. The aim of this, in short, would be to engineer a scenario where market participants focus almost solely on what the new Chair has to say, and what he will do, effectively making Powell redundant before his term ends.

Of course, both this ‘shadow’ Chair idea, as well as a ‘yes man’ being nominated to the role, are grave violations of the principle that the Fed set monetary policy independently, though the current Administration don’t appear especially perturbed by that being an issue.

More At Stake Than Just The Chair

It is not only Powell’s role as Chair that is at stake amid all this.

Governor Kugler’s term on the Board expires next January and, while it is theoretically possible for her to be re-appointed as she is serving an unexpired term, that seems like a highly unlikely scenario. Furthermore, Jefferson’s term as Fed Vice Chair expires in September 2027 and, while his term as Governor runs until January 2036, it has become typical in recent years for the Vice Chair to step down completely once their time in that post comes to an end.

There are, then, set to be at least three Board vacancies for Trump to fill over the next couple of years, potentially more. All three of those will require Senate confirmation, though the same scenario analysis applied to the issue of the Chair, can also be applied to these roles.

What’s The Trade?

This might be the easiest trade idea I’ve ever had to come up with.

Were Powell to be fired, the initial reaction would be a huge injection of volatility into financial markets, and the most dramatic rush to the exit from US assets that it is possible to imagine. Lower, much lower, equities; Treasuries sold across the board; and, the dollar falling off a cliff. Any sign of the longstanding, independent nature of the Fed coming under threat would see investors across the globe selling every single US-based asset that they have, and also poses the genuinely scary prospect of upending the entire way in which the global financial system operates. If this were to happen, then the reserve status of the dollar, and haven value of Treasuries, would be wiped out, probably forever in both cases.

Assuming Powell serves the remainder of his term, but is then succeeded – either in ‘shadow’ form or otherwise – by a Trump acolyte, then the market’s reaction function probably won’t be too dissimilar to the above, albeit likely happening in a marginally more controlled fashion, as the realisation of independence being eroded slowly but surely dawns on participants.

In short, no matter which way this shakes out, not only is the independence of the Fed clearly under threat, but the prospect of de-dollarisation and a move away from US hegemony is an increasingly realistic one. Right now, I will stress, there is no alternative to the greenback as the global reserve currency. However, given how the Trump Admin are fostering an increasing degree of distrust among investors, and operating in an incoherent manner, it may not take much for that view to shift.

Frankly, messing around with the Fed is something that not only Trump, but the US at large, would likely regret for decades to come. It is a path that should not be trodden, but one that those in the Oval Office seem intent on going down anyway.