Powell's Departure May Spark 2026 Rate Cut Expectations

Jefferies Chief Market Strategist David Zervos discussed the potential implications of Federal Reserve Chairman Jerome Powell stepping down during an appearance on CNBC's Power Lunch program. Zervos suggested that a change in leadership at the Fed could lead to a more pro-growth economic agenda, which might include lower interest rates. This shift could create a favorable environment for the stock market, particularly for risky assets such as technology and growth stocks.

Zervos highlighted that Powell's term is set to end in the spring of 2025, and President Trump could appoint at least two new members to the Fed's board during this period. If this happens, four out of the seven members would have been appointed by Trump, potentially leading to a majority that supports a more pro-growth economic agenda. Zervos drew a parallel to former Fed Chairman Alan Greenspan's low interest rate policies in the 1990s, suggesting that a new chairman might take similar risks to support economic growth.

The strategist also noted that market interest in Powell's rhetoric has been declining. Despite Powell signaling an interest rate hike at his latest press conference, markets did not show a significant reaction. This shift in focus indicates that markets are now more concerned with who the next president will be and what policies they will implement. Zervos also mentioned Trump's strategy of neutralizing figures he didn't like during his time in office, suggesting that Powell was gradually being sidelined in this way.

Federal Reserve Chairman Jerome Powell's potential departure has sparked discussions among market strategists about the implications for monetary policy and the broader economy. The departure of Powell could lead to significant shifts in the Federal Reserve's approach to interest rates and economic policy. Powell has consistently maintained that the U.S. does not need to rush into rate cuts until there is more clarity on trade policy. However, market sentiment often diverges from Powell's stance, with investors anticipating rate cuts based on various economic indicators. The strategist noted that Powell's departure could accelerate these expectations, as a new chair might bring a different perspective on monetary policy.

The nomination process for a new Fed chair typically begins 3-4 months before the incumbent's term ends. Given that Powell's tenure is set to conclude in May 2026, the nomination process could start as early as January 2026. This timeline allows for a smooth transition and ensures that the new chair has sufficient time to prepare for the role. Powell has emphasized the need for more data on how tariffs are affecting inflation before making any significant policy changes. This cautious approach has been a hallmark of his tenure, and his departure could lead to a more aggressive or conservative stance, depending on the new chair's economic philosophy.

Geopolitical tensions, particularly the Iran-Israel conflict, could influence the Fed's decisions. Elevated inflation risks, with projections of PCE inflation above 3% for 2025, add another layer of complexity to the economic landscape. A new Fed chair might prioritize different economic indicators or adopt a more hawkish or dovish stance, which could have ripple effects across various sectors of the economy. In summary, the potential departure of Jerome Powell as Fed Chairman could lead to significant changes in monetary policy. Market strategists anticipate that a new chair might bring a different approach to interest rates and economic policy, potentially accelerating expectations for rate cuts. The nomination process and the new chair's economic philosophy will play crucial roles in shaping the future of the U.S. economy.