Shadow Fed Chair: Pros & Cons

Donald Trump’s frustration with Chairman Powell increases by the day. Consequently, per The Wall Street Journal, expectations are that Trump will announce Powell’s successor sooner than typical. Powell’s term expires May 2026. If Trump goes through with an early nomination, this “shadow Fed Chair” would expose views on the economy and monetary policy until Powell’s retirement.

Consequently, this shadow Fed Chair’s opinions may differ from those of Powell and the majority of the FOMC. Given such an unprecedented action, let’s summarize the key points of the article to appreciate the ramifications.

• Market Reaction: Contradictions between Fed members and the shadow Fed chair regarding Fed policy and the economy could create confusion among investors and destabilize markets. Additionally, we wonder if the Fed maintains a more hawkish stance to counteract a dovish shadow Fed Chair.
• Congressional Support: Powell has strong support in Congress. Therefore, Republicans may persuade Trump to wait until Powell’s term expires before introducing his successor.
• Fed Independence: The Fed is independent from the Government. While the President appoints the Chairman, he has no authority over the Fed’s decisions. The shadow Fed Chairman may not have the same independence. Thus, they could become a puppet for the President.
• Potential Candidates: The article lists Scott Bessent, Kevin Warsh, and Christopher Waller as candidates. Bessent “has raved about the idea of one day becoming Fed Chair.”  Warsh is a good candidate but tends to prefer a hawkish policy. Such would clash with Trump’s demands to . Lastly, Waller is a dove, but he is already a member of the Fed’s Board of Governors. The relationship between Powell and Waller, and with other Fed members, could become complicated if Waller is put in this position.  

The Kalshi graphic below shows betting odds favor Waller slightly over Warsh.

The Week Ahead & PCE Data

prices rose 0.2% versus expectations of 0.1%, while total prices rose 0.1%. Both are in line with recent and data. However, the personal income and spending data was weaker than expected as highlighted below.

Personal income fell for the first time in almost four years. While concerning, the decline was due to decline in Social Security payments which were boosted earlier this year by large retroactive payments. The data affirms other economic indicators pointing to slower growth.

and surveys will be released on Monday and Wednesday. Again, traders will focus on the employment and prices subcomponents for clues about how tariffs are impacting the economy and inflation. Also this week will be the , and . Due to the July 4th holiday, the BLS report will come out on Thursday. The market expects an increase of 100k jobs.

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