Trump's Early Fed Chair Pick Could Spark Market Chaos, Warns Blinder

Former Federal Reserve Vice Chair Alan Blinder has warned that naming a so-called shadow Fed chief well before Jerome Powell’s term is up could lead to significant confusion in financial markets and potentially spark a revolt against the eventual chair. This move, according to Blinder, is a self-defeating idea that could undermine the U.S. dollar and Treasury bonds.

President Donald Trump has indicated that his pick to replace Powell is coming “very soon,” and has vowed to appoint someone who will lower interest rates, a move that has been a point of contention between Trump and Powell. Powell, who has held off on lowering rates, has cited the resilient economy and the risk that Trump’s tariffs could reaccelerate inflation.

Powell’s term as chair expires in May 2026, and the typical transition to a new chair is about three to four months, meaning a replacement pick would be named as soon as January under normal circumstances. However, naming a new chair well before that could theoretically influence markets into easing financial conditions, such as lowering bond yields, before the new chair takes office. This could undermine Powell’s messaging in his final months.

In practice, the result could be chaos. Blinder, who served as the Fed’s vice chair in the 1990s, described a shadow chair as “an absolutely horrible idea” because markets would have to sort through potentially very different stances at the same time. “If they’re not singing from the same playbook, which seems likely, this is just going to cause confusion in markets,” he warned.

Similarly, Michael Brown, a senior research strategist, noted that a shadow chair would create “chaotic policy rhetoric, thus further weakening policy transmission.” The perception of greater political influence over the Fed is likely to result in accelerated outflows from both the U.S. dollar and Treasury bonds, pushing yields and other borrowing costs higher.

“Lastly, and probably of most annoyance for Trump, is that all of this nonsense actually makes the bar for the Fed to deliver a rate cut even higher, given mounting external pressure, and a desire to preserve policy independence,” Brown added.

Fed officials typically avoid commenting on politics, White House policies, or bills in Congress, carefully guarding the Fed’s reputation for being independent from political pressure. Blinder flagged the risk that a shadow Fed chair would set up a big showdown in the usually consensus-driven Federal Open Market Committee, which sets rates.

“If he or she contradicts what Powell is saying, that will aggravate the FOMC, almost all of whose members will still be there when the new chair takes over,” he explained. “It opens the door to an open or silent revolt against the chair, which is a rare thing in Fed history.”

A schism is already emerging at the Fed. Trump-appointed governors Christopher Waller and Michelle Bowman have suggested that a rate cut in July could be justified, while Powell and other policymakers have said more months of data are necessary to make such a call.

Meanwhile, the Treasury Secretary downplayed the idea of a shadow Fed chair, but also pointed out that Adriana Kugler’s term as Fed governor expires in early 2026. “So there is a chance that the person who is going to become the chair could be appointed in January, which would probably mean an October, November nomination,” he said.