The next focus of the market: Who is the "shadow Fed chair"?

Three major candidates for the "Shadow Fed Chair" have emerged: former Federal Reserve Board of Governors member Warsh, Economic Council Director Hassett, and current Governor Waller.

Written by: Long Yue

Source: Wall Street News

Trump is brewing an early layout, and the "shadow Federal Reserve Board of Governors chairman" is emerging.

According to news from the Chasing Wind Trading Platform, Deutsche Bank's latest report shows that U.S. President Trump stated in response to questions about the next Federal Reserve Chairman candidate that relevant news may be "announced soon." Although Powell's term as Chairman does not expire until May 2026, the board seat extends until 2028. However, Trump may take advantage of the vacancy of Federal Reserve Board of Governors member Kugler's seat in January 2026 to lay the groundwork for a successor.

Deutsche Bank pointed out that Trump may support the "shadow Federal Reserve Chairman" concept initially proposed by Treasury Secretary (Bessent), which involves appointing the next chairman well in advance. This strategy reflects the government's emphasis on the authority over monetary policy.

As the Trump administration's "Big Beautiful Plan" is expected to be passed in mid-July, and trade policies may become clearer in the coming months, the market focus will shift to the next chairman of The Federal Reserve (FED).

The three major candidates each have their own characteristics, and policy tendencies are key.

Deutsche Bank's report outlines three potential candidates frequently mentioned by the U.S. media recently:

Kevin Warsh (: Served as a member of the Federal Reserve Board of Governors from 2006 to 2011 and is currently a fellow at the Hoover Institution. The betting markets consider him a frontrunner, but he has historically taken a hawkish stance, criticizing the Federal Reserve's quantitative easing policies and questioning the 50 basis point rate cut last September and the size of the Federal Reserve's balance sheet.

Kevin Hassett ): Current Director of the National Economic Council under Trump, but his monetary policy inclination is still unclear.

Christopher Waller (Chris Waller): Current member of the Federal Reserve Board of Governors, recently showing a more dovish stance, believing that the Federal Reserve can overlook the inflation driven by tariffs and lower interest rates.

U.S. Treasury Secretary Basant has also been unexpectedly drawn into the "battle." Deutsche Bank mentioned that they have been asked multiple times by institutional clients whether Basant might take over the Federal Reserve.

Deutsche Bank Optimistic About Waller's Chances

The Deutsche Bank report pointed out that Trump, by calling for a "100 basis point rate cut to inject rocket fuel into the economy," is bound to favor dovish candidates.

According to analysis by Deutsche Bank's AI tools, Waller is the second most dovish official since 2024, following Chicago Fed President Goolsbee (Goolsbee). Recently, Waller has openly advocated to "ignore tariff inflation and prioritize interest rate cuts," directly addressing Trump's demands.

However, the analysis by the bank believes that merely having a dovish tendency is not sufficient. Although the candidates being considered by the government may all promise to cut interest rates, implementing an easing policy is the real challenge.

The report points out that the new chair of the Federal Reserve needs to persuade colleagues to adopt a different policy path. Federal Reserve policy requires a majority vote from the FOMC, and Waller, as the current governor, has established a voting coalition, making it easier to implement a policy shift compared to external candidates.

At the same time, candidates from outside the Federal Reserve Board of Governors, especially if they have criticized the Federal Reserve (such as Warsh) or supported economic policies that could raise doubts about the independence of the Federal Reserve (such as Basu or Hassett), may face greater obstacles.

If Bessent were to become the Chair of the Federal Reserve, he would face accusations of being both "the referee and the player"—having to evaluate the effectiveness of the fiscal policies implemented during his tenure while also needing to deny political interference in monetary decisions.

In contrast, Deutsche Bank believes that the current board member Waller has a better chance.

The new chairman will face a test of independence

Deutsche Bank warns that regardless of who the final candidate is, the market may test the independence of the next Chair of the Federal Reserve (FED) and the credibility of their commitment to achieving inflation targets. If the candidate comes from within the government, this challenge may be even more severe.

In the current context, this test may be even more severe: Trump threatens to fire Powell and calls for the Federal Reserve (FED) to significantly cut interest rates, providing "jet fuel" for the U.S. economy amid strong economic resilience and rising inflation driven by tariffs.

The current resilience of the U.S. economy, coupled with tariffs raising inflationary pressures, may lead to an early warming of market inflation expectations. The new chair of the Federal Reserve Board of Governors must decide whether to maintain the Federal Reserve's hard-won credibility against inflation.