Trump's Pressure on Powell Sparks Fed Leadership Split Fears

President Donald Trump’s persistent pressure on Federal Reserve Chairman Jerome Powell, along with his stated intention to appoint a replacement who will lower interest rates, has sparked concerns about potential conflicts within the typically consensus-driven central bank. The structure of the Fed allows for the possibility of a divided leadership.

Federal Reserve Chairman Jerome Powell holds two significant roles: he is the chair of the Fed’s board of governors and the chair of the Federal Open Market Committee (FOMC). Historically, the board chair has also served as the FOMC chair, but this is not a legal requirement. The Fed’s own explanations indicate that the FOMC can elect its own chair, traditionally the board chair, and the president of the Federal Reserve Bank of New York as its vice chair.

Fed governors, including the chair, are nominated by the president and confirmed by the Senate. However, the FOMC members decide who will be the chair of the rate-setting committee, which includes the seven governors, the New York Fed president, and four other regional Fed presidents who serve on a rotating basis. Fed policymakers are vigilant in maintaining the Fed’s independence from political pressure, which could lead to a situation where one person serves as the FOMC chair and another as the board chair.

A hypothetical split in leadership could occur as follows: The FOMC selects its chair at its first meeting of the year. In 2026, this meeting is scheduled for January 27-28. Only a current member of the FOMC is eligible to be chair. Powell’s term as board chair expires on May 15, 2026, but his term as a governor extends to January 2028. In theory, he could remain on the FOMC and be eligible to serve as its chair until then, provided he does not resign.

A vacancy on the Fed board will open up as Governor Adriana Kugler’s term expires on January 31, 2026. Trump could nominate someone to fill that spot and replace Powell as board chair. However, that person would not be in place in time for the FOMC’s first meeting when the FOMC chair is selected. The FOMC could hold another vote later in the year after a new board chair takes over, but no one can force a revote. It is customary for the New York Fed president to nominate the board chair as FOMC chair, but this is not a requirement.

Unless the FOMC decides to hold another vote, the next time they pick a chair would be at the following year’s first meeting in January 2027. Because Powell’s term as governor expires in January 2028, a similar situation could happen in 2027. This could result in a year where someone is the board chair but not the FOMC chair, leading to a split in monetary responsibility among the participants.

The board of governors and the FOMC have different responsibilities. The FOMC sets the federal funds rate, while the board sets the rate paid to banks on reserves they keep at the Fed and oversees the “discount window,” which can provide liquidity to banks. There has been no case in the Fed’s history where different people chaired the FOMC and the board, and it is unclear if one chair would outrank the other. This could lead to disagreements and conflicts between the FOMC and the board of governors due to their split responsibilities.

A split like this could be disruptive to markets as investors would struggle to determine which chair to follow. The prospect of conflicting voices on monetary policy has already been raised by the talk of a “shadow” Fed chair, who would be nominated well before Powell’s term expires. The idea is that the shadow chair could influence markets into easing financial conditions before taking office and undermine Powell’s messaging in his final months.

Trump has indicated that his pick to replace Powell is coming “very soon” and has vowed to appoint someone who will lower interest rates. The notion of a shadow chair has raised alarms as a recipe for market chaos and could set up a significant showdown within the FOMC. If the shadow chair contradicts Powell’s statements, it could aggravate the FOMC, almost all of whose members will still be there when the new chair takes over, potentially leading to an open or silent revolt against the chair.

Market veteran Ed Yardeni, president of Yardeni Research, noted that whoever the next Fed chair is, they must still work with the rest of the consensus-driven FOMC. If a loyalist takes over and is too much of an outlier on monetary policy compared to the rest of the FOMC, the chair could even be outvoted. This would seriously weaken the power of the Fed chair and raise concerns about internal conflict within the Fed. The FOMC chair cannot order around other members, and Fed officials are likely to guard their independence and tradition of consensus, where persuading, rather than commanding, is how members make decisions. If someone comes in with an authoritarian approach, the system will likely rise up against it.