Vast majority of the FOMC is 'extremely loyal' to Fed Chair Powell: Evercore ISI's Krishna Guha

Key Concepts:

• Jay Powell's potential replacement as Fed Chair
• Adriana Kugler's resignation and its implications
• Trump's decision-making process regarding the Fed Chair appointment
• Stop-gap appointment vs. immediate full-term appointment
• "Shadow Fed Chair" concept and its feasibility
• Committee loyalty to Jay Powell
• Influence of a new Fed Chair on monetary policy
• Potential candidates: Kevin Hassett, Kevin Warsh, Chris Waller, David Malpass
• Rate cuts and labor market assessment
• Senate confirmation

1. Options for Filling the Vacant Fed Seat:

• The president has two main options:
  • Stop-gap appointment: Fill the seat for the remaining four months of Adriana Kugler's unexpired term (until January). This allows the president to keep his options open regarding the next Fed Chair appointment in May.
  • Immediate full-term appointment: Choose the person he wants as the next Fed Chair now and give them the Kugler seat for the full term beginning in January. This would be subject to Senate confirmation.

2. Trump's Decision-Making Process:

• Trump is likely conflicted due to:
  • Frustration with Jay Powell and desire for deeper rate cuts. He wants the next chair to advocate for his preferred policies.
  • His tendency to run things like "Celebrity Apprentice," potentially leading him to consider a "trial run" for candidates.
• A "trial run" would involve putting someone in the seat for a few months to assess their performance before giving them the nod for the Fed Chair position.
• The appeal of having a "shadow Fed Chair" who could potentially influence policy even before Powell's term ends is attractive to Trump.

3. Feasibility of a "Shadow Fed Chair":

• It's argued that the "shadow Fed Chair" concept reflects a lack of understanding of how the Fed operates.
• Even with a seat at the table, the new appointee would be just one person among many and wouldn't have the powers of the chairman.
• The committee is currently very loyal to Jay Powell, especially due to the political pressure he's under.
• A new appointee who tries too hard to "wrestle control" of monetary policy risks souring relationships with other committee members.

4. Committee Dynamics and Influence of a New Chair:

• Bowman and Waller's dissents are considered "sui generis" because they are Trump appointees potentially in line for promotion.
• Even with additional dissents, the majority of the committee is expected to remain with Powell until his term ends.
• A new chair will have more influence but will still be a minority on the committee unless there are further resignations.
• The committee traditionally defers to the chair's judgment, but the new chair will need to negotiate with the balance of the committee to shape monetary policy.

5. Potential Candidates for Fed Chair:

• Kevin Hassett: May have a slight advantage because Trump knows him best, has worked with him closely, and views him as a loyalist.
• Kevin Warsh: Still very much in play.
• Chris Waller: His star has been rising, particularly due to his strong position in favor of a rate cut and his assessment of the labor market.
• David Malpass: A serious contender, but likely behind the other three.
• Scott Besson is reportedly out of the running.

6. Key Quotes:

• "Bowman Waller dissents are sui generis." - Referring to the unique nature of their dissenting opinions.
• "...the vast majority of it is extremely loyal to Jay Powell right now, more loyal than ever because of the political pressure put on him." - Highlighting the committee's current allegiance.

7. Technical Terms and Concepts:

• Rate Cuts: Reductions in the federal funds rate, a key tool used by the Federal Reserve to stimulate economic growth.
• Hawkish: Favoring higher interest rates to combat inflation.
• Dovish: Favoring lower interest rates to stimulate economic growth.
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Reaction Function: A mathematical representation of how a central bank adjusts its policy instruments (e.g., interest rates) in response to changes in economic conditions.

8. Logical Connections:

• The discussion begins with the potential replacement of Jay Powell and then pivots to the implications of Kugler's resignation.
• The options for filling the vacant seat are presented, followed by an analysis of Trump's decision-making process.
• The feasibility of a "shadow Fed Chair" is debated, leading to a discussion of committee dynamics and the influence of a new chair.
• Finally, potential candidates for the Fed Chair position are discussed.

9. Synthesis/Conclusion:

The appointment of the next Fed Chair is a complex decision for President Trump, involving considerations of loyalty, policy preferences, and the dynamics of the Federal Reserve Committee. While the idea of a "shadow Fed Chair" may be appealing, its practical feasibility is questionable. The new chair will face the challenge of navigating a committee that is currently loyal to Jay Powell and negotiating to shape monetary policy. The ultimate decision will likely come down to Trump's personal preferences among the potential candidates.