Next Fed chair in ‘no-win scenario’ as selection process draws to a close

It was always going to be one of the Kevins. At least that was the impression among many across Wall Street and Washington when it came to President Donald Trump’s selection for the next chair of the Federal Reserve

Trump had hinted for months that he wanted his Treasury secretary, Scott Bessent, for the job. But Bessent kept declining the offer.

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That placed Kevin Hassett, a longtime loyalist and economic adviser to Trump, and Kevin Warsh, a former Fed governor who had been in spitting distance of becoming chair during the president’s first term, in leading positions to take over for Jerome Powell in May.

The decision comes down to who Trump believes will be more successful in delivering the substantially lower borrowing costs that he has long struggled to get from the Fed under Powell. Trump, who elevated Powell to chair in 2017, appears haunted by that decision. He has made it clear that this time he wants someone more malleable who will take his advice.

That prerequisite creates a credibility problem for whoever is selected, one that will be difficult to escape. A chair who is seen as beholden to the president risks eroding the public’s confidence that the Fed is making decisions in the best interest of the economy, not the White House. If that crumbles, borrowing costs could move higher, not lower as the president wants.

“Anyone who gets the job is damaged goods,” said Andy Laperriere, head of U.S. policy research for Piper Sandler.

“You’re either going to be the guy who succeeds in getting what the president wants, which will not bode well for your treatment in the history books,” Laperriere said, “or you’re going to be the guy who doesn’t get what the president wants, and he’s going to probably turn on you.”

A race to the finish

Until just a few weeks ago, the clear favorite for the job appeared to be Hassett, director of the White House National Economic Council.

But Trump’s announcement this month that he would wait a bit longer for the final reveal injected more drama into the elaborate audition process. Trump praised Warsh last week after meeting with him, confirming that the race is far from over.

On Wednesday afternoon, Trump met Christopher Waller, a Fed governor he appointed in 2020. Waller, who served as a top economist at the Federal Reserve Bank of St. Louis before relocating to Washington, is viewed as someone who would staunchly defend the institution’s independence. That attribute makes him Wall Street’s preferred pick but also means he faces lower odds of clinching it. In a moderated discussion Wednesday morning, Waller said there was still scope for the central bank to cut interest rates given that the labour market was “very soft.” But he said that there was “no rush” for the Fed to do so.

The intervening weeks have put Hassett on the defensive, having to beat back concerns that have bubbled up around his proximity to the president. In an interview with CBS News on Sunday, Hassett, who has a doctorate in economics, said that while he would listen to Trump’s opinion about interest rates, the president would have “no weight” on the decisions.

Hassett’s critics argue that his close relationship to Trump creates a perception issue that would be hard to overcome. They cite the rise in long-term U.S. government bond yields since Hassett emerged as the front-runner at the end of November as a sign that Wall Street is unnerved. Yields rise when prices fall, indicating less investor appetite to hold Treasuries.

As that narrative has taken hold, Warsh has won support from influential voices. They include Jamie Dimon, CEO of JPMorgan Chase, who said at a private event last week that Warsh would make a “great” chair, even as he added that he respected both Kevins.

But Warsh, who was an economic adviser to President George W. Bush and has deep ties to Wall Street, has his own issues to overcome to get the job.

Warsh’s view that interest rates should be lower is relatively new. As recently as last year, he was warning about resurgent inflation and criticized the central bank for “goosing” the economy by projecting interest rate cuts.

That caution echoed Warsh’s views while he was a Fed governor from 2006 to 2011. Even as the economy was reeling from the global financial crisis, Warsh repeatedly raised concerns about inflation. His opposition to the Fed’s efforts to shore up the economy by buying trillions of dollars of government bonds during that period led him to resign.

Warsh, who in the past called the Fed’s independence “precious,” has since tied lower interest rates to a smaller balance sheet. He argues that shrinking the Fed’s footprint in financial markets — a move likely to raise long-term borrowing costs — would give the central bank space to reduce short-term ones. But that may not be enough to convince Trump.

“It’s really a no-win scenario for those involved,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities. “Either you get worries about credibility, or you get somebody who’s more credible and less loyal.”

Kush Desai, a White House spokesperson, said in a statement that Trump was “committed to nominating the best and most qualified individuals to turn the Biden economic disaster around.”

The coming test

Rising angst about the future of the Fed has not gone unnoticed by the administration. On Tuesday, Bessent praised the Kevins, saying both are “very, very qualified.”

“This idea that people don’t have agency and can’t make up their own minds is wrong,” he told Fox Business. What the next chair needs, however, is an “open mind,” the Treasury secretary added, especially to the idea that “growth does not create inflation.”

Those assurances may have been enough to assuage fears during Trump’s first term. But his aggressive efforts to pressure the Fed since returning to the White House — which have included trying to oust a governor and saying he would “love” to fire Powell — have raised alarm at the lengths the president will go to gain more sway over the institution.

The Supreme Court will hear arguments in January on whether Trump can fire Lisa Cook, the governor in his crosshairs. The outcome of that case will have sweeping implications for the Fed’s ability to operate independently, legal experts warn.

Powell has so far sought to brush off the president’s attacks, repeatedly saying he is focused on doing his job. That has raised the bar for how the next Fed chair will be expected to respond to a barrage from Trump, said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

“Will the new chair be just as unflappable as Chair Powell and be able to cut through the criticism and make the decisions that are best for the economy and its people?” she asked. “That is the greater test of a Fed chair than if they can please the president.”

This article originally appeared in The New York Times.