The successor to Jerome H. Powell will inevitably face an inescapable credibility crisis, according to financial analysts.
Kevin M. Warsh and Kevin A. Hassett have emerged as the two final candidates in what Wall Street and Washington insiders describe as President Trump's closely watched selection process for the next Federal Reserve chair.
While Treasury Secretary Scott Besant had been repeatedly floated as a potential nominee in recent months, his consistent refusals have narrowed the field to these two contenders. Hassett, a longtime Trump economic adviser, and Warsh, a former Fed governor who nearly secured the position during Trump's first term, are now vying to replace Powell when his term expires in May.
The President's ultimate decision will hinge on which candidate he believes can successfully implement significant interest rate cuts - a policy goal that proved elusive during Powell's tenure. Trump, who appointed Powell in 2017, has publicly expressed regret over that decision and now seeks a more compliant successor.
This precondition, however, creates what analysts call a "no-win scenario" for any appointee. A Fed chair perceived as yielding to presidential pressure risks undermining public trust in the central bank's independence, potentially driving borrowing costs higher instead of lower.
"Whoever takes this position starts with damaged credibility," said Andy Laperriere, head of U.S. policy research at Piper Sandler. "You either deliver what the President wants and risk historical condemnation, or fail to meet his demands and face retaliation."
The selection process has taken dramatic turns in recent weeks. While Hassett initially appeared as the frontrunner, Trump's decision to delay the announcement and subsequent praise for Warsh after their meeting last week has kept the competition alive.
This Wednesday, Trump will interview Christopher J. Waller, a Fed governor he appointed in 2020. Though respected for defending Fed independence - making him popular on Wall Street - Waller is considered a longshot candidate.
Hassett has recently faced scrutiny over his close ties to the President. In a Sunday interview, the economics PhD holder insisted that while he listens to Trump's views on rates, the President's opinions carry "no weight" in policy decisions.
Meanwhile, Warsh has gained support from influential figures including JPMorgan Chase CEO Jamie Dimon, who called him an "excellent" potential Fed chair. However, Warsh carries his own baggage, having only recently adopted a dovish stance after previously warning about inflation risks and criticizing Fed stimulus measures.
"This is truly a no-win situation for those involved," said Gennadiy Goldberg, TD Securities' head of U.S. rates strategy. "Either you face a credibility crisis, or you pick someone more credible but less loyal."
The next chair may also confront internal Fed resistance, as policy disagreements intensify amid economic challenges. With the Federal Open Market Committee comprising diverse voices, any rate cuts perceived as exceeding economic needs could face opposition.
RBC Capital Markets' Blake Gwinn predicts increasingly split votes, potentially leaving the chair in the minority. "A new chair can't quietly accept a no-change decision at their first meeting," Gwinn noted. "If they go along with holding rates steady, Trump would be furious."
Such dynamics could impair the Fed's ability to communicate policy clearly and might ultimately backfire on the President. "Ironically, the rates Trump cares about could rise instead of fall if he pushes too hard for cuts next year," Gwinn added.
As concerns mount, Treasury Secretary Besant this week praised both candidates as "very, very qualified," dismissing notions they lack independence. However, he emphasized the next chair must embrace the view that "economic growth doesn't cause inflation."
While such assurances might have sufficed during Trump's first term, his recent aggressive tactics - including attempts to remove a Fed governor and threats to fire Powell - have heightened concerns about preserving Fed independence.
A January Supreme Court case regarding Trump's authority to dismiss Fed Governor Lisa D. Cook could have far-reaching implications for central bank autonomy. Meanwhile, Powell's steadfast response to presidential criticism has set a high bar for his successor.
"The real test," said Ellen Zentner, Morgan Stanley's chief economist, "is whether the new chair can maintain Powell's composure under fire and make decisions best for the economy - far more important than pleasing the President."
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