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Investing.com -- Speculation over a potential “Shadow Fed Chair” has emerged amid renewed political pressure on Federal Reserve Chair Jerome Powell, but Morgan Stanley (NYSE:MS) believes investors remain unconvinced of any imminent shift in policy.
“President Trump has been consistent in messaging a desire for the Fed to cut rates more,” Morgan Stanley analysts wrote, yet “market pricing…implies a rate of just over 3% at the end of next year.”
Despite headlines suggesting a successor could be named as early as this summer, Morgan Stanley said, “We don’t see an immediate change in the Fed reaction function.”
Committee dynamics within the Federal Open Market Committee (FOMC) are likely to limit any significant change, even after Powell’s term ends.
“Perhaps a ‘Shadow Chair’ that is on the FOMC would move markets more,” the analysts noted, but the likelihood of a dramatic shift remains low.
A vacancy on the Federal Reserve Board in January could allow the next Chair to be appointed early, but institutional norms may delay any influence.
Morgan Stanley pointed out that “Chair Powell has avoided any such discussion,” framing the current chatter as “a thought experiment, nothing more.”
Still, over time, new appointments could reshape policy. “Turnover on the Board allows new appointees to have larger and larger sway over the Committee,” the note said, though analysts stressed the market’s current outlook is rooted in precedent.
“Market pricing may rather reflect history, where political appointees tend to shed past allegiances and work toward the institution’s legislative mandate.”
For now, Morgan Stanley sees no shift in policy until Powell’s term concludes, noting “the bigger risk to our Fed forecast is our economic forecast… where we remain quite humble.”