Wall Street Hates the Idea of a ‘Shadow’ Fed Chair. It May Already Have One

President Donald Trump has been relentless in his criticism of Federal Reserve Chairman Jerome Powell. (Getty Images)

The Federal Reserve may already have the so-called shadow chairman that President Donald Trump has said he might soon appoint in a move that could be seen as part of a pressure campaign to lower interest rates and reduce government borrowing costs.

Trump has been relentless with his criticism of Fed Chairman Jerome Powell, and raised expectations that he would fire him earlier this week, before changing course as markets reacted. He claims U.S. interest rates should be “the lowest in the world,” even as he touts the strength of its biggest economy.

Powell hasn’t given in, as inflation remains stubbornly north of the central bank’s 2% target and labor market data continues to show near-full employment. The Fed chair has also said expected tariffs will stoke price pressures into the back half of the year and possibly beyond.

The standoff between the men has led Trump to echo an idea first floated by Treasury Secretary Scott Bessent: the naming of a new Fed chair before the end of Powell’s term in May of next year. Trump said in late June that he could name a successor “very soon.”

Such a shadow chair, in the tradition of British Parliament, would act as a counterweight to Powell’s arguments. That person’s public comments would influence both Fed policy and market reaction.

That position hasn’t been filled in formal terms, but the policy of having an alternative voice to indicate how a post-Powell Fed would behave is now largely up and running. The handful of names seen as likely to succeed Powell after his term expires in May are making it clear.

Fed Governor Christopher Waller, a likely front-runner, made his case for a July rate cut on Thursday night, even as traders peg the odds of such a move at less than 5%, according to the CME Group’s FedWatch tool.

“With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate,” he told an event in New York.

Waller’s remarks followed a Thursday appearance on CNBC by Kevin Warsh. The former Fed governor called for “regime change” at the central bank and accused its rate-setting committee of having a “credibility deficit.”

Bessent, another likely front-runner for the post, as well as National Economic Council director Kevin Hassett, have also questioned the Fed’s recent rate decisions.

Neil Dutta, head of economic research at Renaissance Macro, sees Waller as leading the pack. “We have a ‘Shadow Fed Chair’ already. What we don’t need is a Chairman in Name Only,” he said in a LinkedIn blog post. “Waller likely dissents in July. But, the reality is that many of his colleagues aren’t that far behind him.”

The chorus of voices challenging the Fed’s decision-making, as well as the president’s willingness to at least float the idea of removing its chairman, has created confusion in the markets. It puts the central bank’s rate-setting committee in a no-win situation.

If Fed officials move to lower rates in July, or even September, it could be seen as capitulating to political pressure. Holding rates steady would expose the bank to the risk of having delayed cuts too long in a weakening economy.

Bond markets are already reflecting risks tied to Fed rate cuts that are tied to political pressures. Longer-dated bond yields are rising, with 30-year paper trading north of 5%, as investors worry they won’t be protected from the inflation pressures that tariffs, plus rate cuts and fiscal stimulus, would bring.

Shorter-dated paper, meanwhile, is falling as trades adjust for lower Fed rates even as inflation data continues to suggest tariffs will stoke price pressures in the months ahead.

“The ultimate guardrail against reckless policy isn’t political and legal ‘checks and balances’, which Trump increasingly seems able to override, but the market’s reaction,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

“Unlike raising tariffs, which can be withdrawn before the real damage is done, the reputational costs from firing Powell would be harder to undo.”

Powell himself appears to be feeling the heat, as well.

He sent a letter on Thursday night to Russ Vought, director of the White House Office of Management and Budget, that pushed back on criticisms tied to a $2.5 billion renovation at the Fed’s Eccles building headquarters in Washington.

Markets are already dealing with the lingering threat of tariffs and the new Aug. 1 deadline, myriad geopolitical risks that remain unresolved, and the prospect of a slowing economy with surging fiscal deficits.

The last thing investors need is a threat to Fed independence. But it may already have arrived.

Write to Martin Baccardax at martin.baccardax@barrons.com