Firing Powell would be of no avail? Morgan Stanley: The "shadow chairman of the Federal Reserve" is unlikely to shake the current monetary policy status

The "shadow chairman" of the Federal Reserve may not be able to immediately change the direction of U.S. monetary policy as the outside world expects.

With Trump recently expressing his desire for the Federal Reserve to further cut interest rates, the choice of Powell's successor has become a recent focus for the market.

However, Morgan Stanley's latest analysis suggests that even if the White House nominates a "shadow chairman" to the Federal Reserve Board before the current chairman Powell's term ends, due to the internal dynamics of the Federal Open Market Committee and institutional inertia, the Fed's policy response function is unlikely to change significantly in the short term.

Morgan Stanley's chief economist Seth Carpenter believes that while the current discussion about the "shadow chairman" is subtle, its importance is secondary. Market pricing also reflects low expectations for a dramatic policy shift. For the bank's Fed forecasts, the greater risk currently comes from the economic outlook itself, rather than leadership changes.

Committee Dynamics Limit Policy U-Turns

Speculation about Powell's future is rampant. Trump has repeatedly expressed his desire for the Federal Reserve to further cut interest rates, intensifying market attention on Powell's successor. Some believe that the new chairman could be announced as early as late summer this year and could enter the FOMC early by filling a vacancy on the board, becoming a "shadow chairman."

However, despite the increasing political discussions, the financial markets do not seem to price in a drastically different policy outlook. Current market pricing shows that investors expect the policy rate at the end of next year to be just above 3%, indicating that the market does not believe the Fed's policy will undergo a dramatic change after Powell's term ends in May next year.

Morgan Stanley believes that even with a new chairman in place, the Fed's policy path is unlikely to shift overnight. The core constraint lies in the collective decision-making mechanism of the Federal Open Market Committee. The FOMC's monetary policy is determined by a vote from each member, and while the chairman has significant influence as a leader, they cannot unilaterally push decisions that significantly deviate from the mainstream views of the committee.

Therefore, even if a potential successor is appointed to the board and enters the FOMC early, the current policy framework is expected to persist.

"Shadow Chairman" Difficult to Change Market Pricing Logic

Analysis suggests that market pricing reflects historical experience more than anything else. Historically, politically appointed officials often downplay their past political positions after taking office, instead focusing on fulfilling the agency's statutory tasks, namely maintaining maximum sustainable employment and price stability. Therefore, even if a strongly opinionated "shadow chairman" enters the FOMC, the market may remain cautiously observant.

However, this does not mean that the choice of chairman is insignificant. In the long run, the chairman has a significant influence on the direction of monetary policy Seth Carpenter stated that over time, the chair can gradually reshape the composition of the committee by nominating new board members. Ultimately, even the selection of local Federal Reserve chairs must be approved by the board, which gives the chair significant influence over the entire FOMC. Therefore, while the changes in policy functions may not be substantial in the short term, the range of policy outcomes will significantly expand in the long term.

The report also mentioned some noteworthy institutional details. For example, Powell's term as a Federal Reserve governor does not end with the conclusion of his chairmanship. Theoretically, he could continue to serve as a governor after stepping down as chair, similar to former Vice Chair for Supervision Michael Barr.

Additionally, a more technical detail is that the FOMC chair being held by the chair of the Federal Reserve Board is merely a convention, not a legal requirement. Although the possibility of this separation is extremely low, especially for an institution that has traditionally adhered to orthodoxy, these institutional "quirks" also add more dimensions to thinking about the future. However, Morgan Stanley emphasizes that these ideas currently remain at the level of "thought experiments."

Risk Warning and Disclaimer

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