Written by: Long Yue, Wall Street Insight
Trump is planning an early layout for the "Shadow Fed Chair".
According to Chasing Wind Trading Platform, the latest Deutsche Bank report shows that US President Trump stated when responding to questions about the next Federal Reserve Chair that related news might be "announced soon". Although Powell's chair term does not expire until May 2026, with board seats continuing until 2028, Trump may take the opportunity of the vacant seat of Fed Governor Kruger in January 2026 to plan for a successor in advance.
Deutsche Bank pointed out that Trump might support the "Shadow Fed Chair" concept initially proposed by Treasury Secretary Bessent, which involves appointing the next chair well in advance. This strategy reflects the government's emphasis on monetary policy discourse.
With the Trump administration's "Big Beautiful Act" expected to pass in mid-July and trade policies potentially becoming clearer in the coming months, market focus will shift to the next Fed Chair candidate.
Three Hot Candidates with Distinct Characteristics, Policy Tendencies Become Key
The Deutsche Bank report reviewed three potential candidates frequently mentioned in US media recently:
Kevin Warsh: Served as Federal Reserve Governor from 2006-2011, currently a researcher at the Hoover Institution. The betting market views him as the frontrunner, but historically held a hawkish stance, criticizing the Fed's quantitative easing policy and questioning last September's 50 basis point rate cut and the Fed's balance sheet size.
Kevin Hassett: Currently Trump's National Economic Council Director, but his monetary policy tendency remains unclear.
Chris Waller: Current Federal Reserve Governor, recently showing a more dovish view, believing the Fed can ignore tariff-driven inflation and lower rates.
US Treasury Secretary Bessent was also unexpectedly drawn into the "battlefield". Deutsche Bank mentioned they were frequently asked by institutional clients about Bessent's potential to take over the Fed.
Deutsche Bank Favors Waller's Chances
The Deutsche Bank report noted that Trump, who called for "cutting rates by 100 basis points to inject rocket fuel into the economy", would inevitably lean towards a dovish candidate.
According to Deutsche Bank's AI tool analysis, Waller is the second most dovish official since 2024, second only to Chicago Fed President Goolsbee. Waller recently openly advocated for "ignoring tariff inflation and prioritizing rate cuts", directly addressing Trump's demands.
However, the bank's analysis believes that having a dovish tendency is not sufficient. While government-considered candidates might promise rate cuts, implementing loose policies is the real challenge.
The report indicates that the new Fed Chair needs to convince colleagues to adopt a different policy path. Fed policies require FOMC majority approval, and as a current governor, Waller has already established a voting alliance base, making him easier to implement policy shifts compared to external candidates.
For candidates from outside the Fed, especially those who have criticized the Fed (like Warsh) or supported economic policies that might raise questions about Fed independence (like Bessent or Hassett), they may face greater obstacles.
If Bessent becomes Fed Chair, he would face accusations of being both "referee and player" - having to assess the effectiveness of fiscal policies implemented during his tenure while denying political interference in monetary decisions.
In comparison, Deutsche Bank believes current Governor Waller has better chances.
New Chair Will Face Independence Test
Deutsche Bank warns that regardless of the final candidate, the market may test the next Fed Chair's independence and credibility in achieving inflation targets. If the candidate comes from within the government, this challenge may be more severe.
In the current context, this test may be even more rigorous: Trump threatened to fire Powell and called for the Fed to make significant rate cuts to provide "jet fuel" for the US economy, especially when economic resilience is strong and tariffs are driving inflation up.
With current US economic resilience coupled with tariff-driven inflation pressure, market inflation expectations may heat up in advance, and the new Fed Chair must decide whether to maintain the Fed's hard-earned anti-inflation credibility.
