Trump’s “Shadow Fed” Strategy Sends Ripples Through Markets as Chair Succession Looms

Markets got a jolt this morning after The Wall Street Journal reported that former President Donald Trump is actively considering naming a successor to Federal Reserve Chair Jerome Powell well ahead of the official end of his term in May 2026. The idea, floated previously but gaining traction in recent weeks, would amount to installing a “shadow Fed chair”—a nominee-in-waiting whose dovish rhetoric could shape expectations and apply pressure on the Federal Open Market Committee long before any official change in leadership occurs.

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The reported plan, which Trump has discussed with allies, is seen as a workaround to the legal and market risks of attempting to fire Powell directly. While presidents lack the unilateral authority to dismiss a Fed chair without cause, early announcement of a replacement could be a political masterstroke. It allows Trump to signal a sharp pivot toward looser monetary policy while circumventing the institutional backlash that would follow a direct ouster. In the meantime, the shadow chair could become a vocal advocate for rate cuts—serving as a backseat driver to the current Fed regime.

The list of potential successors reads like a who’s who of conservative economic influencers. Among the top names reportedly under consideration are former Fed governor Kevin Warsh, former National Economic Council director Kevin Hassett, Treasury Secretary Scott Bessent, ex-World Bank president David Malpass, and current Fed governor Christopher Waller. Each brings a different level of experience and ideological bent, but all are broadly seen as more dovish—or politically aligned with Trump—than Powell. Notably, Waller has already broken ranks by publicly supporting a rate cut as soon as the Fed’s July meeting.

Rate cut expectations have shifted markedly as the shadow Fed story gained momentum. Markets are now pricing in approximately 63 basis points of easing by year-end, up from around 40 basis points a few weeks ago. The odds of a July cut, previously negligible, have climbed to nearly 25%. Commentary from policymakers like Waller and Bowman has reinforced the dovish tilt, while Powell’s careful stance—focused on lingering inflation risks and geopolitical uncertainty—has been increasingly overshadowed by political noise.

The implications of this maneuver extend far beyond the Fed. The U.S. dollar index fell sharply on the WSJ report, sliding over 0.6% to a three-year low. A Fed seen as increasingly pliable or politicized would make dollar-denominated assets less attractive to global investors, especially as Treasury issuance remains elevated. At the same time, gold prices climbed and bond yields fell, with traders anticipating easier monetary policy ahead of schedule. This knee-jerk move underscores a broader concern: the erosion of Fed independence and what it means for inflation expectations, long-term rates, and market credibility.

Analysts are split on the long-term market consequences. On one hand, equities—particularly rate-sensitive growth stocks—may benefit in the short term from the prospect of lower borrowing costs. But the boost could be fleeting. “If we get a shadow Fed chair in the autumn saying he will slash rates as soon as possible, you will see inflation fears rise and markets will sell long-dated bonds and push the dollar lower,” Saxo Bank analyst Neil Wilson warned. “As the tax bill cements massive fiscal deficits, you can see why markets could get jittery again.”

The political risks are just as thorny. Appointing a vocal shadow chair could backfire. If the nominee appears too loyal to Trump, they may lack credibility with markets or the Senate. Conversely, if they defend the Fed’s current policy, they risk alienating the man who appointed them. As Douglas Rediker, a policy consultant, put it: “The earlier Trump names his pick, the bigger the bull’s-eye on that person’s back, and the less likely that that person is the actual successor to Powell.”

Powell, for his part, has remained measured. In his congressional testimony this week, he reiterated the Fed’s data-dependent stance and brushed off political pressure. “All I want to do in what’s left of my time at the Fed is to have the economy be strong and have inflation be under control,” he said. Powell's term as chair ends in May 2026, but he could remain on the Fed Board until 2028 unless he chooses to step down earlier—a factor that complicates any transition.

Meanwhile, Wall Street firms are adjusting their forecasts.

Whether the gambit pays off politically or economically remains to be seen. For now, investors are left balancing the benefits of short-term liquidity with the costs of long-term credibility. In the shadow of Trump’s next move, markets are once again realizing that monetary policy doesn’t operate in a vacuum—and neither does the Fed.