Could Trump influence the Fed from within?

President Donald Trump’s opportunity to replace Federal Reserve (Fed) Governor Adriana Kugler -who announced her early resignation (effective 8 August) has opened a strategic window into reshaping the central bank’s leadership. With Fed chair Jerome Powell’s term ending in May 2026, but his governorship extending until January 31, 2028, Trump is expected to use Kugler’s vacant seat to install a ‘shadow Chair’: someone who could influence policy immediately and potentially succeed Powell.

Trump has made no secret of his dissatisfaction with Powell, whom he has repeatedly criticised for being slow in cutting interest rates. The president has signalled that his pick to replace Kugler may also be his choice to lead the Fed once Powell’s chairmanship ends. “I’m going to make the decision soon,” Trump told CNBC on 5 August, adding that he has four candidates in mind, including Kevin Warsh and Kevin Hassett.

This manoeuvre could result in an unusual dynamic: Powell remaining on the board as a governor while Trump’s preferred successor begins shaping policy from within. Such a setup risks sending mixed signals to markets, especially if the incoming governor diverges from Powell’s more cautious stance on rate cuts.

Christopher Waller, a current Fed governor with a term lasting until 2030, is also under consideration for the chairmanship. Waller, known for his pragmatic and dovish views, has recently gained attention for aligning more closely with Trump’s economic priorities. His presence on the board already gives Trump a voice on monetary policy but elevating him to chair would solidify that influence.

If Trump chooses someone other than Waller to replace Kugler -say, Hassett or Warsh -it could create a leadership triangle: Powell as outgoing chair, Waller as influential insider, and the new appointee as chair-in-waiting. This could complicate internal Fed dynamics and external communications.

Trump’s push for a more dovish Federal Reserve would impact asset pricing across markets. Lower interest rates typically boost equities -especially growth sectors like technology by reducing borrowing costs and increasing the present value of future earnings. Credit markets may also benefit, with investors seeking higher yields in corporate debt, while a weaker dollar could result from diminished interest rate differentials and Trump’s “America First” agenda.

However, politicising institutions like the Bureau of Labor Statistics (BLS) poses a deeper risk. The BLS calculates the Consumer Price Index (CPI), which directly determines payouts on Treasury Inflation-Protected Securities (TIPS). The dismissal of BLS chief Erika McEntarfer has already raised concerns about data integrity. The risk is that if CPI figures are seen as manipulated, the $2 trillion TIPS market could lose credibility, distorting inflation expectations and triggering volatility across Treasuries, equities, and the broader economy.

A premature easing cycle could stoke inflation further, forcing the Fed into a policy reversal. In that case, bond investors would become key arbiters, with rising yields reflecting doubts over the Fed’s judgment. The result: heightened market instability, undermining the very stimulus intended to support growth.

Trump’s choice to replace Kugler is more than a routine appointment -it’s a strategic move that could reshape the Fed’s direction well before Powell’s chairmanship ends in May 2026. With Powell likely to remain on the board until January 2028, Trump’s appointee may act as a “shadow chair,” influencing policy and setting the tone for a more politically responsive and potentially looser monetary stance. Whether he selects a loyalist like Hassett, a reformer like Warsh, or elevates Waller, the decision will ripple across markets and signal a shift in central banking priorities - where economic growth may take precedence over inflation control, and institutional independence faces growing pressure.