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President Trump attacked Federal Reserve Chairman Jerome Powell again at a rally on Tuesday and it made me think about another game plan Trump might have for Powell. Maybe the next stage is creating a shadow Fed president to undercut the Fed Chair.
Last week, President Trump said he wouldn’t fire Powell despite his frustration, but this doesn’t mean he’s done bashing Powell or thinking of how to lower the Fed Funds rate and drive down mortgage rates. Treasury Secretary Scott Bessent even outlined the possibility of installing a shadow Fed president months ago in a Barron’s interview.
Let’s consider this fascinating game of chess — or is it a long chain of dominoes falling one by one?
What is a shadow Fed president?
I will present this theory in straightforward terms, as it can become relevant if trade agreements falter and the economy deteriorates without decisive intervention from the Federal Reserve.
Imagine a scenario where President Trump — who doesn’t want Powell to continue in his role once his term ends — opts to nominate a specific individual to undercut Powell before he leaves. Let’s call this person X. With a consistent narrative, this figure begins to engage with the media extensively, emphasizing their intent to reduce the Fed funds rate and lower mortgage rates.
While X currently holds no power, this shadow Fed president effectively provides forward guidance to the markets. This communication sends a clear message that once X ascends to power, a shift in monetary policy is imminent, creating anticipation and potentially influencing economic behavior even before any official changes occur.
Will other Fed presidents join?
We recently delved into the compelling issue of a potential Fed civil war, highlighting how certain Fed presidents, traditionally aligned with conservative principles, have shifted toward my “labor over inflation” camp.
While not all Fed presidents support this shift, consider the ramifications if X advocates for aggressive rate cuts and other monetary tools and gains support from even a few Fed presidents. This scenario resembles an old-school power grab and it could become a reality if Fed Presidents Waller and Bowman join this chorus. They will ultimately echo the sentiments of the next Fed president and you will have more than one voice telling the markets that more aggressive measures are happening.
Conclusion
The coming months could see the U.S. thrown into a job loss recession, which might force the Fed to cut rates regardless of inflation data. However, if we continue to have a rate battle between Trump and Powell, the possibility of a shadow Fed president increases. This person would tell the markets to get ready for more aggressive rate cuts.
Now, maybe the Fed aggressively cuts rates and uses other tools to stimulate the economy on its own — something that would prompt Trump to compliment Powell like he did during COVID-19. However, if that doesn’t happen, don’t be surprised to see a shadow Fed president enter the scene.
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