The Fed at a Crossroads
How the Next Fed Chair Could Redefine U.S. Monetary Policy — and Its Independence
The fight to choose the next Federal Reserve Chair could be the most consequential appointment since Paul Volcker took the reins in 1979.
After months of speculation, markets now face the real prospect that the Fed’s independence could be reshaped.
With Treasury Secretary Scott Bessent now seemingly out of contention, attention is fixed on three contenders: Chris Waller, the continuity choice; Kevin Hassett, whose close political ties raise the most independence concerns; and Kevin Warsh, the wildcard who could mark the sharpest break from recent policy.
With equities at record highs and bond markets steady, investors are in “wait-and-see” mode. But the outcome could shape markets for years to come.
A Fed Under Attack
For months, Jerome Powell has endured jibes and barbs from the President as he has swatted away suggestions for lower rates. Although 50 years have passed, the ghost of Arthur Burns still lingers, and markets remember how he was cajoled and manipulated by Nixon into easier policy, contributing to the Great Inflation.
Can the next Chair be as resolute as Powell?
The timing of this appointment raises the stakes. It comes at a time when a rare coalition of ideological opposites — from easy-money advocates to those seeking a fundamental rethink of the Fed’s role — are calling for change.
Unsurprisingly, the easy-money camp (Trump, parts of Wall Street, and the business community) is critical of the Fed for not lowering rates — but that is their typical bias.
At the same time, mainstream economists and former policymakers have joined the chorus of criticism. While remarks from Treasury Secretary Scott Bessent and Council of Economic Advisers Chair Stephen Miran can be dismissed as political, other prominent voices — such as former Fed Governor Larry Lindsey and market economist Jeremy Siegel — have weighed in as well.
The sense of crisis was underscored when former PIMCO CEO Mohamed El-Erian suggested it might be better for the Fed’s independence if Jerome Powell resigned.
The Fed’s Failures
The list of shortcomings against the Fed reads like a failing end-of-term report card.
Chief amongst them is the 2021 policy error, when the Fed was slow to raise rates in response to seemingly “transitory inflation.” In a recent CNBC interview, Warsh described it as the greatest error in macro forecasting in 45 years.
The Fed’s overall policy framework is a second. The Fed believes in a Keynesian labour-market view of inflation — the idea that wages, employment levels, and inflation expectations are the primary drivers of inflation. That framework ignores factors such as government spending and monetary growth, both of which fuelled the 2021 inflation spike.
Quantitative easing is another bone of contention. Yes, it helped stabilise markets during the GFC, but extensive QE in the last decade may have distorted capital markets, fuelled inequality, and created other unforeseen consequences. Unwinding it has also been fiendishly difficult.
The merit of shifting from a scarce-reserve to an ample-reserves system and paying interest on bank reserves has also been questioned. The interest payments mean the Fed now operates at a loss, opening another avenue for populist criticism of the institution.
But it’s not just in the technicalities of monetary policy where the Fed faces fire. The 2019 shift to Flexible Average Inflation Targeting, and a focus on “inclusive” employment, arguably delayed the 2022 tightening.
And the list goes on: corporate bond buying during COVID is seen as overreach, the demise of SVB a supervisory lapse, and the rise in yields last year, after the Fed cut rates, a sign of a loss of credibility.
The Case for the Defence
The Fed could reasonably argue that much of the criticism is unfair. Yes, inflation remains above target, but it has fallen sharply from its 2021–2022 peak. The economy is slowing, yet unemployment is still just 4.2%. Before tariffs entered the picture, the Fed appeared to have pulled off the elusive soft landing, something few FOMC’s have managed in the last four decades.
Many mainstream economists see as much success as error in the 2021–2022 episode. Inflation was reduced without a major rise in unemployment — a result they attribute to the Fed’s credibility and its inflation-targeting framework, which helped prevent a wage–price spiral.
Even so, some economists within this sympathetic camp see a central bank that is too reactive, overly reliant on backward-looking data, and too enamoured with communication and forward guidance.
That’s why Powell’s successor matters. This is more than a change of style; there’s an appetite for a deeper, structural rethink of how the Fed operates.
Continuity or Regime Change?
Despite all of this, the current favourite, Chris Waller, hardly reflects a radical departure.
As an academic economist and a Fed governor, he has the right credentials. Yes, he is currently aligned with the President on the need for lower interest rates, but he is by no means a persistent dove. In fact, his selection would help ease a lot of the concern about independence.
He argued for higher rates in late 2021 and for faster, more aggressive tightening in 2022. His broad framework has also been correct: he anticipated that inflation would fall in 2022/2023 without a significant cost in terms of unemployment — a view that put him at odds with the likes of Larry Summers.
He’s a fan of wrestling analogies, which may help him connect with the President, but the big question from Trump’s perspective will be: how loyal will he be? Certainly, there is nothing in his approach to say that he will always lean dovish. That could set up a clash on monetary policy down the line.
Hassett is Trump’s safe bet — and the market’s nightmare pick.
His loyalty to Trump is undeniable. He was Chairman of the Council of Economic Advisors in Trump 1.0 and after that worked for Trump’s son-in-law Jared Kushner in his private equity firm. These days, he appears almost daily on CNBC defending the President’s policies.
His alignment with the administration is partially ideological — he has written extensively on supply-side economics — but the clear suspicion is that policy would be open to the President’s persuasions on rates.
The appointment of Hassett would likely result in an immediate hit to the USD and a rise in long-term bond yields.
Warsh is the dark horse — the candidate who could tear up the policy manual.
Like the others, he shares the President’s public criticism of the Fed and sees a case for rate cuts, citing the disinflationary impact of AI. But beyond the near term, a Warsh-led Fed could break sharply with the past.
He has called for new approaches, fresher ideas, and sharper debate. He opposes the routine use of QE, wants a smaller balance sheet, and accuses the Fed of enabling Washington’s fiscal profligacy through bond buying.
Yet his framework is frustratingly undefined. He warns against money printing but leaves open whether fiscal deficits and monetary targets would be formal guideposts. He rejects data dependence without offering an alternative. He rails against bailouts but still claims credit for the Fed’s crisis moves in 2008.
In tone, he sounds like he could bring Volcker’s inflation-fighting zeal to balance sheet reduction — with unpredictable consequences. If his stance on QE and deficits holds, markets could face a central bank less willing to finance large fiscal gaps and less inclined to backstop markets. That combination would be far less friendly to both bonds and equities.
A Fork in the Road
Some dismiss the appointment as overblown — after all, the Chair is just one vote on the FOMC. But that ignores the Chair’s power to set the agenda, steer debate, and direct the Fed’s research. History shows that, Bill Miller aside, the Chair has always shaped the institution.
Waller may be the favourite but the race is far from settled. A Bloomberg report last week suggested the search has widened to ten candidates. Trump’s choice of market-friendly Scott Bessent as Treasury Secretary will fuel hopes that Waller — the most competent and continuity-minded option in investors’ eyes — could prevail.
Yet the stakes are bigger than one man’s CV. The Fed is already battling a crisis of confidence; more broadly, trust in US institutions is eroding, as shown by April’s rare simultaneous sell-off in stocks, bonds, and the dollar.
If America’s independent central bank is seen as compromised, it won’t just be a blow to the Fed — it will strike at the heart of the US exceptionalism narrative and global faith in the dollar and American assets.
