It was always going to be one of the Kevins. At least that was the impression among many across Wall Street and Washington when it came to President Trump’s selection for the next chair of the Federal Reserve.
Mr. Trump had hinted for months that he wanted his Treasury secretary, Scott Bessent, for the job. But Mr. Bessent kept declining the offer.
That placed Kevin A. Hassett, a longtime loyalist and economic adviser to Mr. Trump, and Kevin M. Warsh, a former Fed governor who had been in spitting distance of becoming chair during the president’s first term, in leading positions to take over for Jerome H. Powell in May.
The decision comes down to who Mr. Trump believes will be more successful in delivering the substantially lower borrowing costs that he has long struggled to get from the Fed under Mr. Powell. Mr. Trump, who elevated Mr. Powell to chair in 2017, appears haunted by that decision. He has made it clear that this time he wants someone more malleable who will take his advice.
That prerequisite creates a credibility problem for whoever is selected, one that will be difficult to escape. A chair who is seen as beholden to the president risks eroding the public’s confidence that the Fed is making decisions in the best interest of the economy, not the White House. If that crumbles, borrowing costs could move higher, not lower as the president wants.
“Anyone who gets the job is damaged goods,” said Andy Laperriere, head of U.S. policy research for Piper Sandler.
“You’re either going to be the guy who succeeds in getting what the president wants, which will not bode well for your treatment in the history books,” Mr. Laperriere said, “or you’re going to be the guy who doesn’t get what the president wants, and he’s going to probably turn on you.”
A Race to the Finish
Until just a few weeks ago, the clear favorite for the job appeared to be Mr. Hassett, the director of the White House National Economic Council.
But Mr. Trump’s announcement this month that he would wait a bit longer for the final reveal injected more drama into the elaborate audition process. Mr. Trump praised Mr. Warsh last week after meeting with him, confirming that the race is far from over.
On Wednesday afternoon, Mr. Trump will meet with Christopher J. Waller, a Fed governor he appointed in 2020. Mr. Waller, who served as a top economist at the Federal Reserve Bank of St. Louis before relocating to Washington, is viewed as someone who would staunchly defend the institution’s independence. That attribute makes him Wall Street’s preferred pick but also means he faces lower odds of clinching it.
The intervening weeks have put Mr. Hassett on the defensive, having to beat back concerns that have bubbled up around his proximity to the president. In an interview with CBS News on Sunday, Mr. Hassett, who has a Ph.D. in economics, said that while he would listen to Mr. Trump’s opinion about interest rates, the president would have “no weight” on the decisions.
Mr. Hassett’s critics argue that his close relationship to Mr. Trump creates a perception issue that would be hard to overcome. They cite the rise in long-term U.S. government bond yields since Mr. Hassett emerged as the front-runner at the end of November as a sign that Wall Street is unnerved. Yields rise when prices fall, indicating less investor appetite to hold Treasuries.
As that narrative has taken hold, Mr. Warsh has won support from influential voices. They include Jamie Dimon, the chief executive of JPMorgan Chase, who said at a private event last week that Mr. Warsh would make a “great” chair, even as he added that he respected both Kevins.
But Mr. Warsh, who was an economic adviser to President George W. Bush and has deep ties to Wall Street, has his own issues to overcome to get the job.
Mr. Warsh’s view that interest rates should be lower is relatively new. As recently as last year, he was warning about resurgent inflation and criticized the central bank for “goosing” the economy by projecting interest rate cuts.
That caution echoed Mr. Warsh’s views while he was a Fed governor from 2006 to 2011. Even as the economy was reeling from the global financial crisis, Mr. Warsh repeatedly raised concerns about inflation. His opposition to the Fed’s efforts to shore up the economy by buying trillions of dollars of government bonds during that period led him to resign.
Mr. Warsh, who in the past called the Fed’s independence “precious,” has since tied lower interest rates to a smaller balance sheet. He argues that shrinking the Fed’s footprint in financial markets — a move likely to raise long-term borrowing costs — would give the central bank space to reduce short-term ones. But that may not be enough to convince Mr. Trump.
“It’s really a no-win scenario for those involved.” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities. “Either you get worries about credibility, or you get somebody who’s more credible and less loyal.”
Kush Desai, a White House spokesman, said in a statement that Mr. Trump was “committed to nominating the best and most qualified individuals to turn the Biden economic disaster around.”
Fractured Fed
The next chair is also likely to face pushback from inside the Fed. Decisions over interest rates have already become highly divided, reflecting the challenging economic backdrop.
Any attempt to push through lower interest rates than what is needed economically is likely to be thwarted by others on the central bank’s policy-setting committee, which consists of the seven members of the Board of Governors, the president of the New York Fed and a rotating group of four presidents from the 12 regional reserve banks.
Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, said he expected much more fractured votes going forward, including the possibility that the chair is in the minority camp.
“A new chair can’t go to his first meeting and not dissent if the vote is to hold interest rates steady,” Mr. Gwinn said. “If he votes along with the majority to keep rates unchanged, Trump is going to lose his mind.”
That risks complicating the Fed’s ability to clearly communicate its policy plans. This dynamic could also backfire on the president, Mr. Gwinn said.
“If you get into next year and he’s forcing cuts, the irony is that he may see all the rates he cares about go up,” he said.
The Coming Test
Rising angst about the future of the Fed has not gone unnoticed by the administration. On Tuesday, Mr. Bessent praised the Kevins, saying both are “very, very qualified.”
“This idea that people don’t have agency and can’t make up their own minds is wrong,” he told Fox Business. What the next chair needs, however, is an “open mind,” the Treasury secretary added, especially to the idea that “growth does not create inflation.”
Those assurances may have been enough to assuage fears during Mr. Trump’s first term. But his aggressive efforts to pressure the Fed since returning to the White House — which has included trying to oust a governor and saying he would “love” to fire Mr. Powell — have raised alarm at the lengths the president will go to gain more sway over the institution.
The Supreme Court will hear arguments in January on whether Mr. Trump can fire Lisa D. Cook, the governor in his cross hairs. The outcome of that case will have sweeping implications for the Fed’s ability to operate independently, legal experts warn.
Mr. Powell has so far sought to brush off the president’s attacks, repeatedly saying he is focused on doing his job. That has raised the bar for how the next Fed chair will be expected to respond to a barrage from Mr. Trump, said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
“Will the new chair be just as unflappable as Chair Powell and be able to cut through the criticism and make the decisions that are best for the economy and its people?” she asked. “That is the greater test of a Fed chair than if they can please the president.”
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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