The "reshuffle drama" of the Federal Reserve has now begun

Federal Reserve Governor Adriana Kugler unexpectedly announced her resignation, providing Trump with a key bargaining chip to "reshape" the Federal Reserve.

Last week, Federal Reserve Governor Adriana Kugler unexpectedly announced her departure this Friday, about six months ahead of her scheduled term. According to CCTV News, Trump stated in a speech on Tuesday that he might soon announce a new chairman for the Federal Reserve, with the decision on the candidates for the Federal Reserve Board to be made this weekend.

This could become Trump's only opportunity to "install his own candidates" on the committee before Chairman Powell's term expires in May next year. According to regulations, the U.S. president can only choose the Federal Reserve chairman from among the members of the Federal Reserve Board.

According to media reports citing informed sources, Trump is seriously considering making Kugler's successor the next Federal Reserve chairman.

Wall Street Journal previously mentioned that Trump narrowed the potential future Federal Reserve chairman candidates to four, including two Kevins—former Federal Reserve Governor Kevin Warsh and Director of the National Economic Council Kevin Hassett, with the identity of the fourth candidate undisclosed, excluding Treasury Secretary Mnuchin.

Analysts point out that the nominated candidates need to seek a balance between maintaining the independence of the Federal Reserve and demonstrating loyalty to Trump's policies, a delicate situation that could undermine their credibility as future chairman.

Unexpected Resignation Creates Early Strategic Opportunity for Trump

The Federal Reserve chairman must be chosen from among the board members, and Powell's term as a governor does not end until 2028. During Trump's term, no other current governor's term will expire.

Kugler's unexpected resignation provides Trump with an unforeseen strategic opportunity. Kugler was previously nominated by Biden in 2023 and has advocated for maintaining stable interest rates this year.

Her sudden departure gives Trump an unexpected chance to "install" the next Federal Reserve chairman candidate among the board members.

Piper Sandler's head of U.S. policy research, Andy Laperriere, stated:

"If they want to promote someone who is currently not on the committee to be chairman, then they have to choose him."

According to media reports, as of Monday evening, Trump was still listening to allies' suggestions for Kugler's successor and had not made a final decision. This appointment requires Senate confirmation, and the Senate will not reconvene until September.

To become chairman by next May, the nominee needs to go through three rounds of confirmation: first confirmed as a governor, then confirmed for the chairman position, and finally confirmed for the new 14-year governor term.

Candidate Range Gradually Clarifies

According to informed sources, Sean Hannity and Newsmax CEO Chris Ruddy have discussed with Trump the idea of nominating Treasury Secretary Mnuchin for the next Federal Reserve chairmanHowever, Trump stated in an interview with CNBC on Tuesday that he has removed Bessenet from the potential candidates for Federal Reserve Chair, saying that the latter "wants to stay in his current position."

Steve Bannon privately recommended former economic advisor Judy Shelton to replace Kugler to Trump. Trump had nominated Shelton for a Federal Reserve governor position during his first term, but she failed to gain Senate confirmation.

Media reports citing sources close to the government indicated that if Trump decides to quickly fill the position with his intended next chair candidate, current White House National Economic Council Director Kevin Hassett is the obvious frontrunner.

Investment manager Mark Spindel described Hassett as "the easiest to confirm and the most loyal."

Trump confirmed in the CNBC interview that Hassett and former Federal Reserve governor Warsh are among the four final candidates to replace Powell.

The Balancing Act of Independence and Loyalty

Analysts pointed out that winning this "quasi-chair" position could be a double-edged sword.

To gain and maintain Trump's support, candidates may need to publicly challenge Powell and his colleagues, especially those who are more cautious about rate cuts due to concerns over high inflation. However, doing so could alienate committee members, whose support is crucial once they become chair.

Laperriere believes that anyone nominated to fill Kugler's seat and auditioning for the chair position faces the risk of having to express loyalty to Trump's preference for rate cuts at the expense of their perceived independence:

"Whoever this candidate is, they are a damaged commodity."

Laperriere also warned that the Federal Reserve will ultimately face a difficult choice about whether to cut rates. If the public begins to believe that the Federal Reserve is making decisions based on political loyalty rather than objective analysis, the Fed could lose credibility:

"That day is coming, and it will come almost regardless. Do you really want a Federal Reserve chair burdened by this?"

As an alternative, Trump may also decide to temporarily appoint a vocal critic of the Federal Reserve and then replace them with his chosen chair candidate next spring. In Tuesday's interview, Trump mentioned that he has two candidates in mind for this approach.

Another option is to appoint a current governor as chair.

Analysis indicates that the most likely internal candidate is Waller, who was appointed by Trump five years ago and had a conversation with Bessenet about the position two weeks ago, and voted against the Federal Reserve's decision to maintain interest rates last week