Trump’s pivotal choice just became more complex
President Donald Trump has spent months asserting that he has the chance to replace Jerome Powell when the term of the Federal Reserve chair concludes in May. However, prior to Trump’s most significant indication that he has chosen a successor, investors conveyed a clear message: Not so fast. Following an extended period of conjecture regarding the identities of the numerous candidates, Trump confirmed last week that he has identified the individual he intends to nominate for the most influential position in the US economy. Shortly thereafter, in a Cabinet meeting, Trump identified Kevin Hassett as “a potential Fed chair,” inquiring, “Are we allowed to say that?” The issue at hand is that certain investors express apprehension regarding the potential appointment of Hassett to lead the Federal Reserve, particularly during a period of division among policymakers concerning the appropriate course of action for interest rates.
Concerns arise regarding Hassett, a longstanding ally of Trump, as there is a belief that he may prioritize adhering to the president’s directives over maintaining the Federal Reserve’s autonomy in determining interest rates free from political influence, despite the fact that the Fed chair possesses only a single vote. Their concerns are significant, as markets may react negatively, potentially compelling Trump to retract his nomination of Hassett, resulting in a notable reversal. “Markets really act as a sanity check for policy and other major decisions,” stated Angelo Kourkafas. The selection of Trump’s nominee was inherently complex due to regulations governing eligibility, and restructuring his senior economic advisory team would introduce an additional layer of intricacy. Fed Governor Lisa Cook’s position remains in flux as the judiciary assesses the legality of Trump’s effort to dismiss her, underscoring the complexity of the situation. In the previous month, bond investors communicated to the Treasury Department their concerns that Hassett might advocate for a significant reduction in borrowing costs to satisfy Trump, as per reports. The report indicates that this sentiment was echoed in discussions with executives from prominent banks, asset managers, and other key participants in the U.S. debt market. “The market is already attempting to assess the degree of dovishness or hawkishness that the next Fed chair may exhibit,” stated Tom Porcelli. However, he added that one cannot truly predict how an individual will perform until they are actively in the role. The Fed’s status as an independently funded agency allows it to make rate decisions devoid of political influence, bolstering investor confidence. If investors lose confidence, they may require higher returns to finance government borrowing, and the irony is that higher yields would likely push long-term interest rates up regardless.
However, the composition of the Fed’s rate-setting committee may serve as a safeguard: The chair holds only one vote among twelve and cannot unilaterally overrule the majority. “A range of views and policy approaches are represented around the table, and then everyone gets one vote,” stated Bill English. “There’s a committee for a reason, and if the committee disagrees with the chair, then it’s possible the chair loses a vote, which has never happened in the past.” Meanwhile, a network of Trump advisers may see their roles shift. If Trump selects Hassett to head the central bank, he must appoint a new NEC director, with speculation circling Treasury Secretary Scott Bessent as a possible dual-role candidate. The Council of Economic Advisers also plays a central role; its chair, Stephen Miran, is on temporary leave to serve as a Fed governor and has advocated for aggressive rate cuts. Miran’s term at the Fed ends in January, but he has indicated he will not resign until a successor is confirmed. The selection of the Fed chair is further constrained by regulations requiring the appointee to be drawn from current Fed governors, and there are no vacancies. Powell’s term as chair ends in May, though his governorship extends to 2028, leaving uncertainty about whether he will remain. Trump might replace Hassett with Miran and then elevate Miran to chair in May, or wait in case Powell resigns, allowing both Hassett and Miran to join the Fed. Meanwhile, Governor Lisa Cook’s lawsuit challenging Trump’s attempt to remove her could also reshape the Board’s composition if she loses, giving Trump further influence at a time when central-bank independence is under intense scrutiny.
If Cook loses her case and is replaced, Trump would have effectively influenced the majority of the Board during a politically sensitive moment. “There is apprehension regarding the potential politicization of the Federal Reserve, which could lead to an unacceptably elevated inflation rate in the long run,” English stated. “The market may react negatively if a new chair is appointed and the committee, for various reasons, decides to reduce rates more than is necessary.” In this environment, the stakes of Trump’s Fed appointment are extraordinarily high, and the interplay between market reaction, institutional guardrails, political pressure, and leadership uncertainty will define the months leading to Powell’s term expiration.
