Earlier this year, US President Donald Trump hinted at firing Fed Chair Jerome Powell, causing turmoil in the markets. Then the President confirmed that Powell would serve out his term. But, it seems Trump hasn’t given up on doing more than just talking about really, really wanting rates to be lower.
Ironically, Powell also agrees that the Fed could lower rates. But he – along with many of his colleagues – argue that the potential for inflation from the trade war means that the Fed has to wait to see what happens. By the time his term is up in May of 2026, the uncertainty from tariffs might be resolved. And could mean that whoever had the job, rates would be lower.
What’s Happening?
It’s normal for the President to announce his pick for the top job at the Fed several months in advance. This gives the market some time to adjust and become comfortable with the communication style of the new Fed. But Trump said last week he would announce his pick “soon”, which is 11 months before Powell’s term is up, which is a much longer period than ever before.
This has led to speculation that the Administration is looking to influence market speculation by having a “Shadow” Fed Chair. (Not to be confused with the already existing “Shadow FOMC”, which is a private group of economists that comment on Fed policy.) This person might be able to “jawbone” the market by suggesting aggressive rate cuts as soon as he’s in office. Some have even speculated that a pre-emptive nomination of a Fed Chair could allow for an internal “revolt” of sorts among FOMC members who are inclined to cut rates under the current circumstances.
What Does It Mean for the Markets?
After speculation of the “Shadow Fed”, markets moved to pricing in a higher chance of rate cuts this year. Now, the odds are over 90% of a rate cut in September. And there is now a 60% chance of a second cut in December, instead of a 64% of there not being a cut before. It seems markets are already anticipating further easing, although the messaging from the Fed has been largely consistent lately.
Where things are even more dramatic is next year. The market is pricing in as many as five rate cuts after May of 2026. That would be a return to the aggressive rate seen last year, and before markets expected inflation to rise in the wake of the trade war. It also might imply a slowdown in the US economy. After all, Trump wants lower rates because he believes it would help increase economic activity.
Downside for the Dollar?
The Trump Administration has made no secret about wanting lower borrowing costs through a lower yield on the benchmark 10-year Treasury. That would help reduce interest payments from the government as well as support the economy. Overall, that would also likely benefit the stock market.
But, lower interest rates would also likely weaken the dollar, which has already seen a large drop in comparable value this year. With other central banks moving into a holding pattern as inflation has stabilized, aggressive easing by the Fed would likely cause the greenback to fall even further.
