Appointing a "rate-cutting faction" Federal Reserve Chairman, can Trump get his wish? It's not that simple
The new Federal Reserve Chairman needs to provide a reasonable explanation for the interest rate cut to gain support. Trump is considering appointing a new chairman early to weaken Powell's influence, but observers warn that cutting rates is not an easy task. Competitors include Kevin Hassett and Kevin Warsh, and Treasury Secretary Mnuchin is also interested. Although investors are betting on a rate cut, the Federal Reserve needs a majority support from the FOMC, and the chairman cannot make unilateral decisions. The current interest rate remains at 4.25%-4.5%, and policymakers have differing views on rate cuts, mainly due to varying opinions on the impact of Trump's tariffs
According to the Zhitong Finance APP, as the conflict between U.S. President Trump and Federal Reserve Chairman Powell escalates, Trump is considering appointing the next Federal Reserve chairman in advance to weaken Powell's influence. However, observers closely watching the Federal Reserve warn not to expect the next chairman to easily implement significant interest rate cuts.
Reports indicate that Kevin Hassett, Director of the National Economic Council, and former Federal Reserve Governor Kevin Warsh are in fierce competition for the key position of Federal Reserve Chairman. Meanwhile, U.S. Treasury Secretary Mnuchin is rumored to want to serve as both Treasury Secretary and Federal Reserve Chairman, with even rumors suggesting that Trump has proposed allowing him to hold both positions.
Trump has repeatedly expressed his dissatisfaction with Powell, blaming high interest rate policies for hindering economic growth, and has frequently called for the Federal Reserve to cut rates. Trump has also made it clear that he expects the next Federal Reserve chairman to quickly initiate rate cuts, which is more explicit than the conditions during his first term.
Currently, some investors are betting in the futures market that when Powell's term ends in May next year, the benchmark interest rate will be immediately lowered—although this is unlikely to happen. These trades bet that the next Federal Reserve chairman appointed by Trump will be "someone who wants to cut rates," allowing Trump to get his wish.
However, such bets overlook the real workings of how the Federal Reserve sets interest rate policy. NYU economics professor Mark Gertler stated, "The Federal Reserve chairman cannot act like a dictator." He pointed out that adjusting interest rates requires the support of a majority of the Federal Open Market Committee (FOMC) members. There are 19 policymakers involved in the FOMC, of which 12 have voting rights. In other words, the new Federal Reserve chairman must provide reasonable justifications for rate cuts to persuade the other members to support his claims.
So far this year, Federal Reserve officials have unanimously agreed to maintain the federal funds rate in the range of 4.25% to 4.5%. However, there are significant divisions among policymakers regarding whether to cut rates, mainly due to differing views on the impact of Trump's tariffs on inflation.
Trump may take advantage of the vacancy that will arise when Federal Reserve Governor Adriana Kugler's term ends in January 2025 to place his new chairman candidate on the Federal Reserve Board. If Powell resigns from his governorship, Trump will also gain another vacancy. Powell has not yet made it clear whether he will completely leave the Federal Reserve Board after stepping down as chairman.
Even if Powell leaves the Federal Reserve Board after his term, it does not mean that the votes needed for rate cuts will be sufficient. Whether other officials are willing to support rate cuts depends more on the actual performance of the U.S. economy, and persuading other policymakers one by one is not easy.
Policy disagreements are not uncommon, but in an institution that values broad consensus, especially when there is a significant policy shift, voting results rarely show severe divisions. Brett Ryan, a senior economist at Deutsche Bank Securities in the U.S., stated, "Ultimately, this is still a committee decision, and whoever the next chairman is must build consensus."
