The Apprentice: Fed chair episode

Like the US TV show ‘The Apprentice’, which President Donald Trump once fronted, it could be argued that some Federal Open Market Committee (FOMC) members are sounding more dovish recently, possibly in the hope that the president selects them to be the next Federal Reserve (Fed) chair. Trump has made it abundantly clear through social media and comments to the press that he is not happy with Jerome Powell’s unwillingness to cut interest rates quickly. Powell’s term, as Fed chair expires in May 2026.

Whoever he chooses is set to be more dovish than Powell. However, Trump must be careful. It’s unlikely that he picks an ultra-dovish candidate, since his choice may not be approved by the Senate. Republicans and Democrats are aware of what the impact of the inflation shock of 2021 and 2022 had on the outcome of the 2024 election. 

The choice of Fed chair is particularly important for financial markets. Not only do they lead FOMC meetings their every word is also scrutinised by investors looking for signals about US monetary policy outlook. From time to time, central bankers can have a significant impact on markets. Take, for example, former European Central Bank (ECB) President Mario Draghi. In off-the-cuff comments to reporters on 26 July 2012 during the London Olympics he said the central bank would do “whatever it takes” to preserve the euro. His words calmed markets and effectively helped to bring an end to the euro-debt crisis.

Some recent potential candidates for the post of Fed chair include current and past members of the FOMC:

Christopher Waller: As a dove, he reiterated during a CNN interview on 20 June that the Fed should not wait for the labour market to deteriorate before cutting interest rates.¹ He emphasised the importance of acting pre-emptively to avoid overtightening, especially as inflation appears to be stabilising.

Kevin Warsh: Although not on the current FOMC, Warsh did serve as a Federal Reserve Governor from 2006 to 2011, While not known as a classic dove, Warsh gave a speech on 25 April this year at the International Monetary Fund (IMF)-hosted Commanding Heights lecture where he signalled openness to more accommodative policy under certain conditions.²

Although Trump has not given a date of a new Fed chair announcement, he told reporters at a NATO summit in the Hague on 25 June that “he goes out pretty soon”. It may be that Trump wants to get round Powell’s resistance to cut interest as quickly as he desires by selecting a dovish candidate to drive down both government bond yields and the US dollar to encourage more liquidity being pumped into the financial system. This easing in financial conditions could lift “animal spirits” and drive economic growth. 

Or it may be Trump wants to use his comments to replace the Fed chair with a dovish candidate to influence the Treasury market. A reduction in the cost of government borrowing could make it easier to pass his and the Republican’s signature legislation (the One, Big Beautiful Bill Act) through Congress. 

It would not be surprising if Trump announces his Fed Chair pick this summer. Financial markets and currencies are already front-running the possibility that a Trump-endorsed Fed chair can shift the FOMC into a more dovish direction by signalling a pivot towards lower interest rates to stimulate employment and economic growth. This would mark a sharp departure from Powell’s current stance, which has emphasised keeping interest rates elevated to tame inflation. 

A more dovish stance from the Fed could impact asset prices influencing both risk and return prospects across markets.

Equity markets often respond favourably to lower interest rates with borrowing costs reduced, which increases the present value of future earnings, effectively boosting valuations. Pro-cyclical growth sectors like technology and consumer discretionary tend to outperform in these conditions.

All things being equal, bond markets benefit from lower interest rates, as this encourages investors to seek higher yields, boosting demand for corporate bonds. However, if inflation expectations rise from an easing / pro-growth stance in monetary policy, Treasury Inflation-Protected Securities (TIPS) could outperform conventional bonds.

For currencies, it’s likely the US dollar (already down 10% this year) could depreciate further, as a lower interest rate would reduce the yield advantage of holding dollars, making the greenback less attractive compared to other major currencies. Moreover, global investors are now coming round to the idea that Trump’s “America First” agenda is incompatible with a strong dollar. 

A key market risk would be premature interest rate cuts leading to higher inflation. Under that scenario, markets might quickly shift focus from the short-term economic boost to fears of a Fed policy reversal to contain inflation. In that case, bond investors would be the key arbiters, with yields rising and inflation expectations ticking up, reflecting doubts over the Fed's judgment. The result could be heightened volatility across asset classes, undermining the very easing that the Fed hoped would support growth.

The Fed chair appointment is shaping up to be a defining event in the post-election economic landscape. While Trump’s ultimate pick remains unknown, the direction is clear: a move towards a more politically responsive and potentially looser monetary stance. For investors, the implications could be significant and usher in a new era of central banking where economic growth takes priority over inflation vigilance.

1. CNBC.com, Fed Governor Waller says central bank could cut rates as early as July, 20 June 2025
2. Hoover.org, Remarks by Kevin Warsh Commanding Heights: Central Banks at a Crossroads, 25 April 2025