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Investing.com -- The Trump administration’s opportunity to reshape the Federal Reserve could have far-reaching implications for monetary policy, according to Evercore ISI.
Analysts say the risk isn’t in Donald Trump attempting to fire Fed Chair Jerome Powell before his term ends, but rather in the broader erosion of Fed independence through new appointments.
“We worry more about this process of Trumpification eroding Fed independence and leading to a lurch in the Fed reaction function on a through 2026 horizon than we do about Trump trying to fire Powell before the end of his term,” said Krishna Guha, vice chairman and head of global policy and central bank strategy at Evercore ISI.
Trump will have an early opportunity to install a potential successor to Powell following Governor Kugler’s resignation. Evercore notes that while Senate confirmation remains a requirement, “we have less confidence that the Senate will act as a rigorous check on all the Board nominations.”
Among possible successors, Guha identifies Kevin Warsh and Kevin Hassett as likely outside candidates, while Thomas Waller could be elevated internally. The accelerated timeline may rule out Dave Bessent, whose confirmation path would be more complicated.
Depending on how many current governors step down in 2026, the Fed Board could turn over rapidly, allowing Trump to fill several seats and install a chair more aligned with his preference for aggressive rate cuts.
Evercore lays out two scenarios. In a benign case, only a few changes occur, leading to a Fed led by a Trump-appointed chair but operating within existing norms. In this version, monetary policy would remain a “structured negotiation” between the chair and an otherwise unchanged FOMC, Guha said.
However, in the alternative scenario, a wave of resignations could result in “a much bigger lurch in the reaction function and potential bond and currency market riot if this is overdone,” he added. This, the note warned, could “lead to a sharp rise in the inflation risk premium, a riot in the bond market and a significant hit to the economy.”
The degree of institutional shift would depend not just on who Trump appoints, but also on whether existing governors choose to remain.
Guha points to personal decisions by key figures like Powell, Barr, Jefferson, and Cook as pivotal. If several leave, “every Fed governor is a Trump appointee,” he said.
Guha also cautions against assuming that regional Fed presidents could counterbalance a Trump-aligned board. He notes that the chair could “sideline the FOMC” by using tools that fall under Board—not Committee—control.
He adds that the chair could also “bring recalcitrant presidents to heel by making aggressive use of the Board’s control over funding and headcount and indeed the approval of the presidents themselves.”
If Trump appointees gain a majority, the chair could wield much more influence over policy direction.
While rate cuts in 2026 may be justified by economic conditions, the concern is whether they are pursued “in a manner that would not have been likely under conventional Fed strategy but is congruent with the President’s desire for deep front-loaded rate cuts.”
Guha argues that cuts might be warranted “based on the evolution of economic conditions,” such as slowing labor markets or easing inflation pass-through, but warned that the real risk lies in a policy shift “not supported by the data.”