It would always be one of the Kevins. At least that was the impression many on Wall Street and in Washington had when it came to electing President Trump as the next chairman of the Federal Reserve.
Mr. Trump had indicated for months that he wanted his Treasury Secretary, Scott Bessent, for the job. But Mr. Bessent repeatedly rejected 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 on the verge of becoming chairman during the president's first term, in leadership roles that they were set to take over for Jerome H. Powell in May.
The decision depends on who Mr. Trump believes will be more successful in achieving the much lower borrowing costs he has long sought from the Fed under Mr. Powell. Mr. Trump, who appointed Mr. Powell as chairman in 2017, appears to be haunted by that decision. He has made it clear that this time he wants someone who is more malleable and will follow his advice.
This requirement creates a credibility problem for the chosen one that is difficult to escape. A chairman who is seen as beholden to the president risks undermining public confidence that the Fed is making decisions in the best interests of the economy rather than in the interests of the White House. If that fails, borrowing costs could rise, not fall as the president wants.
“Anyone who gets the job is damaged goods,” said Andy Laperriere, head of U.S. policy research at Piper Sandler.
“Either you're going to be the guy who manages to get what the president wants, which won't 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'll probably turn against you.”
A race to the finish
Until a few weeks ago, the clear favorite for the job appeared to be Mr. Hassett, director of the White House National Economic Council.
But Mr. Trump's announcement this month that he would wait a little longer for the final unveiling brought even more drama to the arduous audition process. Mr. Trump praised Mr. Warsh after meeting with him last week and acknowledged 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 moving to Washington, is seen as someone who would vigorously defend the institution's independence. This trait makes him Wall Street's preferred candidate, but also means his chances of winning are slimmer. In a moderated discussion on Wednesday morning, Mr Waller said the central bank still had scope to cut interest rates given the “very weak” state of the labor market. But he said there was “no rush” for the Fed to do so.
The past few weeks have put Mr. Hassett on the defensive and forced to allay concerns that have arisen about his closeness to the president. In an interview with CBS News on Sunday, Mr. Hassett, who has a Ph.D. In economics, he said that while he would listen to Mr. Trump's views on interest rates, the president would have “no influence” on the decisions.
Mr. Hassett's critics argue that his close relationship with Mr. Trump creates a perception problem that will be difficult to overcome. They cite the rise in long-term U.S. Treasury yields since Mr. Hassett emerged as the front-runner in late November as a sign that Wall Street is unsettled. Yields rise when prices fall, suggesting investors are less willing to hold government bonds.
Mr. Trump's decision will depend on which candidate he believes will achieve significantly lower interest rates.Credit…Al Drago for The New York Times
As this narrative took hold, Mr. Warsh gained the support of influential voices. They include Jamie Dimon, the chief executive of JPMorgan Chase, who said at a private event last week that Mr. Warsh would be a “great” chairman, even as he added that he respected both Kevins.
But Mr. Warsh, who was an economic adviser to President George W. Bush and has close ties to Wall Street, will have to solve his own problems to get the job.
Mr. Warsh's view that interest rates should be lower is relatively new. Last year he warned that inflation would rise again and criticized the central bank for “stimulating” the economy by predicting interest rate cuts.
That caution reflected Mr. Warsh's views when he was Fed governor from 2006 to 2011. Even as the economy suffered from the global financial crisis, Mr Warsh repeatedly raised concerns about inflation. His opposition to the Fed's efforts to support the economy by purchasing trillions of dollars' worth of Treasury bonds during that time led to him resigning.
Mr. Warsh, who in the past has called the Fed's independence “valuable,” has since linked lower interest rates to a smaller balance sheet. He argues that reducing the Fed's influence in financial markets – a move that would likely increase long-term borrowing costs – would give the central bank leeway to reduce short-term borrowing. But that may not be enough to convince Mr. Trump.
“It really is a no-win scenario for those involved.” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities. “Either you worry about credibility, or you get someone who is more credible and less loyal.”
Kush Desai, a White House spokesman, said in a statement that Mr. Trump was “committed to appointing the best and most qualified people to turn the Biden economic disaster around.”
Broken Fed
The next chair will also likely face resistance within the Fed. Decisions on interest rates are already very different, reflecting the difficult economic environment.
Any attempt to impose interest rates lower than economically necessary is likely to be thwarted by other members of the central bank's monetary policy 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 of the 12 regional reserve banks.
Blake Gwinn, head of U.S. interest rate strategy at RBC Capital Markets, said he expects there will be more split votes in the future, including the possibility that the leader is from the minority camp.
“A new chairman can’t go to his first meeting and disagree when it comes to keeping interest rates stable,” Gwinn said. “If he votes with a majority to keep interest rates unchanged, Trump will lose his mind.”
This could complicate the Fed's ability to clearly communicate its policy plans. That dynamic could also backfire on the president, Mr. Gwinn said.
“If you go into next year and he forces cuts, the irony is that all the rates he cares about are going to go up,” he said.
The coming test
Increasing concerns about the future of the Fed have not gone unnoticed by the government. On Tuesday, Mr. Bessent praised the Kevins, saying both were “very, very qualified.”
“The idea that people don't have agency and can't form their own opinions is wrong,” he told Fox Business. What the next leader needs, however, is an “open-mindedness,” the finance minister added, particularly to the idea that “growth does not produce inflation.”
Those assurances may have been enough to allay fears during Mr. Trump's first term. But his aggressive attempts to pressure the Fed since returning to the White House – which have included trying to oust a governor and saying he would “gladly” fire Mr Powell – have raised concerns about the lengths the president will go to gain more influence over the institution.
The Supreme Court will debate in January whether Mr. Trump can fire Lisa D. Cook, the governor he has set his sights on. The outcome of this case will have far-reaching implications for the Fed's ability to operate independently, legal experts warn.
Mr. Powell has so far tried to fend off the president's attacks, repeating that he is focused on his work. “This has raised the bar for how the next Fed chief is likely to respond to a bombshell from Mr. Trump,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.
“Will the new chairman be as stalwart as Chairman Powell, able to withstand criticism and make the decisions that are best for the economy and its people?” she asked. “That’s the bigger test for a Fed chair than whether he can please the president.”