The next focus of the market: Who is the "shadow Fed chair"?
Trump's hint that "the candidate will be announced soon" has ignited market nerves in the race for the next Federal Reserve Chair a year and a half early. Three main candidates have emerged: former Federal Reserve Governor Kevin Warsh, Council of Economic Advisers Chair Kevin Hassett, and current Governor Christopher Waller. Deutsche Bank believes that Trump, who is calling for a 100 basis point rate cut, favors a dovish approach and sees Waller as having a better chance. At the same time, it warns that the new chair will face a test of independence, as rising inflation expectations will require balancing the pressure to cut rates with maintaining the credibility of the Federal Reserve
Trump is brewing an early layout, and the "shadow Federal Reserve Chair" emerges.
According to the latest report from Deutsche Bank, U.S. President Trump stated in response to questions about the next Federal Reserve Chair candidate that relevant news may be "announced soon." Although Powell's term as Chair does not expire until May 2026, and board seats extend to 2028, Trump may take advantage of the vacancy of Federal Reserve Governor Adriana Kugler's seat in January 2026 to lay the groundwork for a successor.
Deutsche Bank pointed out that Trump may support the "shadow Federal Reserve Chair" concept initially proposed by Treasury Secretary Bessent, which involves appointing the next Chair long in advance. This strategy reflects the government's emphasis on the discourse power of monetary policy.
As the Trump administration's "Great Beautiful Act" is expected to pass in mid-July, and trade policies may become clearer in the coming months, market focus will shift to the next Federal Reserve Chair candidate.
Three major popular candidates each have their characteristics, with policy inclination being key
The Deutsche Bank report outlines three potential candidates frequently mentioned by U.S. media:
Kevin Warsh: Served as a Federal Reserve Governor from 2006 to 2011 and is currently a researcher at the Hoover Institution. The betting market sees him as the frontrunner, but he has historically held a hawkish stance, criticizing the Federal Reserve's quantitative easing policies and questioning last September's 50 basis point rate cut and the size of the Federal Reserve's balance sheet.
Kevin Hassett: Currently serves as the Director of the National Economic Council under Trump, but his monetary policy inclination is unclear.
Chris Waller: Currently a Federal Reserve Governor, he has recently shown a more dovish viewpoint, believing that the Federal Reserve can overlook inflation driven by tariffs and lower interest rates. According to Deutsche Bank's AI tool analysis, Waller is the second most dovish official since 2024, only behind Chicago Fed President Goolsbee.
Deutsche Bank is optimistic about Waller's chances
The Deutsche Bank report indicates that Trump's call for "a 100 basis point rate cut to inject rocket fuel into the economy" will likely favor a dovish candidate.
However, the analysis suggests that merely having a dovish inclination is not sufficient. While the candidates considered by the government may all promise rate cuts, implementing accommodative policies is the real challenge. The influence of the Federal Reserve Chair stems from convention rather than institutional design, and monetary policy decisions require a majority vote from the Federal Open Market Committee (FOMC).
The report notes that the new Chair will need to persuade colleagues to adopt a different policy path. External candidates who have criticized the Federal Reserve (like Warsh) or participated in policies that may undermine the Federal Reserve's independence (like Hassett) will face greater resistance.
In contrast, Deutsche Bank believes that the current Governor Waller has a better chance.
The new Chair will face tests of independence
Deutsche Bank warns that regardless of the final candidate, the market may test the independence of the next Federal Reserve Chair and the credibility of their commitment to achieving inflation targets. If the candidate comes from within the government, this challenge may be even more severe In the current context, this test may be even more severe: Trump threatens to fire Powell and calls for the Federal Reserve to significantly cut interest rates, providing "jet fuel" for the U.S. economy amid strong economic resilience and rising inflation driven by tariffs.
The current resilience of the U.S. economy, combined with tariff-induced inflationary pressures, may lead to an early warming of market inflation expectations. The new Federal Reserve chair must decide whether to maintain the hard-won anti-inflation credibility of the Federal Reserve
