As Jerome Powell’s statutory term approaches its end in May 2026, the Federal Reserve System is entering the most turbulent and uncertain transition of power in its century-long history. This selection is not merely a change of personnel; it represents a fundamental reshaping of the American monetary policy paradigm against the backdrop of global geopolitical restructuring, normalized fiscal deficits, and the full rollout of "Trump Economics 2.0."
In December 2025, the Federal Open Market Committee (FOMC) voted 9-3 to cut interest rates by 25 basis points. This extremely rare dissent not only marked the end of the era of "consensus management" under Powell but also foreshadowed deep ideological rifts within the Fed. At this politically sensitive moment, the choice of the next Fed Chair will determine whether the U.S. can achieve the Trump administration’s ambitious "3-3-3" economic growth target while maintaining low inflation, or whether it will slide toward "Fiscal Dominance" and financial repression.
This report aims to comprehensively forecast and analyze the appointment of the next Fed Chair and its profound implications by dissecting the current political-economic environment, the policy inclinations of candidates, and market microstructure. The report explores the current political dynamics and the "Shadow Fed Chair" phenomenon, details the theoretical frameworks of key candidates, analyzes how the new Chair fits into Scott Bessent’s macroeconomic plan, and deduces the interest rate path and economic endgame post-2026.
Political Economy Background: From Consensus to Rupture
Twilight of the Powell Era and Internal Power Restructuring
By the end of 2025, the policy-making environment at the Federal Reserve had qualitatively changed. Although Jerome Powell attempted to maintain the central bank's technocratic image and policy continuity, pressure from the White House became ubiquitous. The December 2025 meeting served as the prime window to observe this shift: the Fed witnessed its most significant internal division since 2019.
On one side, traditional hawks (such as Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee) remained wary of sticky inflation, advocating for a pause in rate cuts. On the other side, Stephen Miran, a Governor recently appointed by Trump, cast a radical dovish dissent, arguing for a larger 50 basis point cut. Miran’s stance was not an isolated event; he represents the "new thinking" the Trump administration seeks to implant within the Fed—the belief that current real interest rates are too high and are stifling supply-side recovery capabilities.
This restructuring of internal power means the next Chair will inherit not a committee united against inflation, but a battlefield fiercely contested between "growth priority" and "stability priority." President Trump has clearly stated he will announce a successor in early 2026 or sooner, a break from convention widely interpreted by the market as a "lame-duck" strategy aimed at weakening the incumbent Chair's influence.
The "Shadow Fed Chair" Strategy: Anchoring Expectations Early
The Trump administration appears to be employing a strategy known as the "Shadow Fed Chair." By high-profile locking in and announcing a successor (such as Kevin Hassett) months or even half a year before Powell’s term ends, the White House intends to force financial markets to price in the new Chair’s reaction function ahead of time.
The logic behind this strategy is threefold:
- Weakening Incumbent Authority: Once the market is convinced the new Chair will implement more aggressive easing, any hawkish signals from Powell in his final months will be automatically discounted or ignored.
- Prematurely Lowering Yields: If the "Shadow Chair" is perceived as extremely dovish, long-term Treasury yields may decline in advance (or rise due to inflation fears, depending on credibility assessments), thereby altering financial conditions before the official handover.
- Political Pressure: This approach pushes the Fed’s policy debate from closed doors into the public arena, forcing FOMC members to consider the incoming "regime change" when voting.
Current market pricing has begun to reflect this expectation. Prediction markets show investors hedging for potential "Jumbo Cuts" in the summer of 2026, a scenario that diverges significantly from the moderate path indicated by the Fed's current dot plot.
Candidate Panorama and Deep Profiling
The competitive landscape for the next Fed Chair has become increasingly clear. This is not just a contest of competence but a collision of two distinct monetary policy philosophies: a traditional "restraint" anchored in inflation targeting versus an emerging "expansionism" anchored in nominal growth.
Candidate Overview and Market Probability
Based on data from prediction markets like Polymarket and Kalshi, as well as Wall Street intelligence, the candidate tier is as follows:
| Candidate Name | Current Position/Background | Probability Trend | Core Label | Policy Inclination Summary |
|---|---|---|---|---|
| Kevin Hassett | Director, National Economic Council (NEC) | Frontrunner (63%-86%) | Loyal Reformist | Advocates breaking the "black box"; supports rules-based policy but with dovish parameters; believes supply-side reform offsets inflation. |
| Kevin Warsh | Hoover Institution / Former Governor | Rising (11%-16%) | Wall St. Favorite | Criticizes "mission creep"; anti-QE, but may be more flexible on rates than traditional reputation suggests; leans toward financial stability. |
| Christopher Waller | Current Fed Governor | Stable (6%-8%) | Theory Architect | Proposed "Look Through Tariffs" theory, providing academic cover for maintaining looseness in an inflationary environment. |
| Stephen Miran | Current Fed Governor | Very Low (Too Young/Radical) | Internal Vanguard | Extremely dovish; advocates aggressive cuts combined with fiscal policy; opposes strong dollar; serves as a policy weather vane. |
| Scott Bessent | Treasury Secretary | N/A (Selector) | 3-3-3 Architect | While not a candidate, his "3-3-3" plan serves as the hard constraint for selecting the Chair. |
Kevin Hassett: The Executor Breaking the "Black Box"
Personal Background and Political Capital:
As the Chair of the Council of Economic Advisers (CEA) during Trump’s first term and current Director of the National Economic Council (NEC), Hassett is a faithful believer in and executor of "Trump Economics." He has established deep trust with Trump and is seen as the best candidate to translate the White House's will into monetary policy reality.
Core Philosophy and Policy Inclination:
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Critique of the "Black Box" and Transparency Revolution:
Hassett has long criticized the Fed's decision-making procedures. He compares the Fed to the wizard behind the curtain in "The Wizard of Oz," arguing that its processes lack transparency and model parameters remain undisclosed. If elected, he would likely push for extreme transparency reforms, including publishing the specific code and assumptions of internal Fed models. This ostensibly increases transparency but may make it easier for the White House and Congress to intervene in technical details.
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Weaponization of Rules-Based Policy (Taylor Rule):
Hassett supports using the Taylor Rule to guide interest rates. However, the key lies in his interpretation of the parameters. While the traditional Taylor Rule demands high rates during high inflation, Hassett tends to believe that supply-side reforms (tax cuts, deregulation) increase the potential GDP growth rate ($r^*$), allowing for lower nominal rates even when inflation is slightly elevated. He views current rates as restrictive relative to supply-side potential.
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Non-Traditional Interpretation of Inflation Sources:
Hassett tends to attribute inflation to supply shocks (e.g., energy policy restrictions, regulatory costs) rather than demand overheating. Consequently, his prescription is not to suppress demand via rate hikes, but to encourage investment through rate cuts to expand supply. This logic allows him to justify calls for rate cuts even in high-inflation environments.
Market Impact Prediction:
The market generally views Hassett as the "most dovish" choice. Analysts warn his appointment could be seen as a loss of Fed independence, potentially triggering a sell-off by "Bond Vigilantes," causing long-term yields to spike and paradoxically tightening financial conditions.
Kevin Warsh: The Institutionalist Compromise
Personal Background and Political Capital:
Warsh was one of the youngest Governors in Fed history, known for his crisis management during 2008. He has close ties to Wall Street and is viewed as a "safe option" acceptable to both the Republican establishment and Trump loyalists.
Core Philosophy and Policy Inclination:
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Anti-"Mission Creep":
Warsh’s most distinct label is his opposition to the expansion of the Fed's functions. He severely criticizes the Fed's recent forays into social issues like climate change and racial equity, believing this not only exceeds its mandate but distracts from the core mission of price stability. If elected, he would significantly reduce the Fed's research departments and cut ESG-related projects.
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Deep Skepticism of Quantitative Easing (QE):
Warsh has long criticized QE policies, arguing they distort asset prices, exacerbate wealth inequality, and effectively subsidize government debt through "financial repression." He advocates for the Fed to shrink its balance sheet and return to a normal scale.
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Subtle Shift in Stance:
Despite a hawkish record, Warsh has shown flexibility in recent rhetoric to secure the nomination. He has begun emphasizing that "supply-side reforms" can create a low-inflation environment, implying that rates need not remain high under Trump’s deregulation policies. This shift is interpreted as a willingness to cooperate with the White House’s growth goals in exchange for leading institutional reform at the Fed.
Market Impact Prediction:
Warsh’s initial election might boost the dollar and lower long-term yields as markets trust he will defend the Fed's credibility. However, how he balances "anti-QE" views with "Trump’s need for low-rate financing" remains a significant source of uncertainty.
Christopher Waller: The Theory Architect and Compromiser
Personal Background and Political Capital:
As a current Governor, Waller is not a typical "politician," but his deep academic background has provided critical theoretical support for Trump’s economic policies.
Core Philosophy and Policy Inclination:
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"Looking Through" Tariffs Theory:
This is Waller’s greatest value to the Trump administration. In 2025 speeches, Waller systematically explained why the central bank should "look through" price increases caused by tariffs. He argues that as long as inflation expectations are anchored, a one-time Price Level Shock caused by tariffs should not trigger a tightening response; instead, because tariffs may suppress consumption, the central bank should cut rates to hedge against growth risks. This theory perfectly resolves the contradiction of Trump wanting "both high tariffs and low interest rates."
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Preemptive Dove:
Waller demonstrated strong forward-looking tendencies in 2025, advocating action before data fully deteriorates. He believes downside risks to the labor market outweigh upside risks to inflation, and is thus willing to cut rates before inflation fully returns to 2%.
Market Impact Prediction:
If Waller is selected, it will be viewed as a combination of policy continuity and political compromise. Market expectations would remain relatively stable, but his tolerance for tariffs could lead to a persistent inflation premium.
Trump’s Economic Philosophy and the Fed: Reconstructing the Macro Narrative
The selection of the next Fed Chair must be considered within the context of the Trump administration's grand economic reconstruction plan. Treasury Secretary Scott Bessent’s core economic platform sets inviolable policy boundaries for the new Chair.
Bessent’s "3-3-3" Plan: Challenge of the Impossible Triangle
Bessent has proposed the famous "3-3-3" economic revival plan:
- 3% Real GDP Growth
- Budget Deficit reduced to 3% of GDP
- Increase Oil Production by 3 Million Barrels/Day
Deep Analysis:
Arithmetically, this plan contains inherent contradictions. To compress the deficit from over 6% to 3% while maintaining or expanding tax cuts (which typically increase deficits), extremely high economic growth (expanding the denominator) and a significant reduction in interest expenses (shrinking the numerator) are required.
Currently, U.S. debt interest payments exceed the defense budget, becoming a heavy fiscal burden. If rates remain at restrictive levels (4%-5%), the "3-3-3" plan is mathematically insolvent.
Implicit Requirements for the Fed:
Therefore, the "hard criteria" for Bessent’s selection of a Fed Chair is effectively: Must be willing to facilitate "Financial Repression." This involves suppressing nominal interest rates below the nominal GDP growth rate to artificially lower government financing costs. This requires the new Chair not only to cut rates but also to control the yield curve through asset purchases or regulatory means (such as modifying Bank SLR rules to force bond buying) if long-end yields rise.
The "Mar-a-Lago Accord": Global Game of a Weak Dollar
The Trump team, particularly Bessent and Miran, is brewing a grand concept known as the "Mar-a-Lago Accord." This is a modern version of the "Plaza Accord," aiming to depress the dollar exchange rate through international coordination or unilateral threats to reverse trade deficits and revive U.S. manufacturing.
Fed Role Dislocation:
This concept runs counter to the traditional Fed preference for a "Strong Dollar" (as an anti-inflation tool). Implementing this accord requires the Fed to:
- Abandon Exchange Rate Neutrality: Actively cooperate with Treasury's verbal intervention.
- Implement Loose Monetary Policy: Expand dollar supply to narrow interest rate differentials with other currencies.
- Balance Sheet Tools: Potentially restart QE or stop QT to inject dollar liquidity into global markets.
Among candidates, Stephen Miran is the most active advocate of this theory, arguing that an overly strong dollar is the root of U.S. structural imbalances. Hassett and Waller’s theoretical frameworks are also more compatible with this goal than traditional hawks.
Interest Rate Strategy Forecast for 2026 and Beyond: From "Inflation Targeting" to "Nominal Growth Targeting"
Based on candidate philosophies and the administration's economic platform, we predict a fundamental shift in Fed monetary policy post-2026. This shift may not occur through amending the Federal Reserve Act but through reinterpreting the existing "dual mandate."
Three-Stage Forecast of Interest Rate Strategy
Phase 1: Aggressive Dovish Pivot (First Half of 2026)
- Background: Powell departs; new Chair (e.g., Hassett) takes office.
- Strategy: Return of "Jumbo Cuts." Although the dot plot shows limited room for cuts in 2026, the new Chair is likely to cite "precautionary cuts," potentially delivering consecutive cuts in the summer of 2026, possibly 50 basis points each time.
- Rationale: The new Chair will invoke Waller’s "look through" theory to ignore CPI rebounds caused by tariffs, while emphasizing that Real Rates are too high relative to supply-side potential, hindering the "3-3-3" goals.
Phase 2: Implicit Yield Curve Control (Second Half of 2026 - 2027)
- Background: As rates fall and deficits expand, long-term inflation expectations rise, leading "Bond Vigilantes" to sell long-term debt, pushing up yields and threatening equity and housing markets.
- Strategy: Opening the Financial Repression Toolbox. The Fed may not announce direct YCC (like the Bank of Japan) but will use more covert means:
- Return of Operation Twist: Selling short-term and buying long-term bonds to suppress long-end rates.
- Regulation-Driven Demand: Cooperating with the Treasury to modify Liquidity Coverage Ratio (LCR) and Supplementary Leverage Ratio (SLR) rules to exempt Treasuries from capital requirements, inducing commercial banks to buy government debt at scale.
- Goal: Ensure the 10-year Treasury yield remains below the nominal GDP growth rate (e.g., if nominal growth is 5%, control yield under 4%).
Phase 3: Substantive Adjustment of Inflation Target (2027 and Beyond)
- Background: Persistent looseness and tariffs lead to a structural upward shift in the inflation center.
- Strategy: Opportunistic Reflation. The Fed may not publicly abandon the 2% target but will introduce "Asymmetric Average Inflation Targeting," allowing inflation to run in the 3%-4% range for an extended period to "make up" for past low inflation (though logically tenuous), effectively diluting the debt stock.
Interest Rate Path Scenario Matrix
| Scenario | Core Driver | Probability | Forecasted Fed Funds Rate (End 2026) | Forecasted 10Y Treasury Yield | Key Policy Characteristics |
|---|---|---|---|---|---|
| Baseline (Hassett-led) | Support "3-3-3" plan, ignore tariff inflation | 60% | 2.50% - 3.00% | 4.50% - 5.00% | Rapid cuts, tolerance for inflation overshoot, verbal intervention on long bonds. |
| Radical (Miran/Bessent Will) | Full financial repression, weak dollar strategy | 25% | < 2.00% | 3.50% - 4.00% | Restart QE, implicit YCC, administrative measures forcing banks to buy debt. |
| Hawkish (Warsh Returns to Orthodoxy) | Institutional independence rebound, fighting inflation | 15% | 3.50% - 4.00% | > 5.50% | Maintain high rates against tariff inflation, refuse to finance deficits, market volatility. |
Deep Discussion on Economic Impact: Illusion of Prosperity and Structural Costs
The selection of the new Fed Chair and the resulting policy shift will have profound and complex structural effects on the U.S. economy.
Structural Return of Inflation and the Shadow of "Stagflation"
If the new Chair adopts Waller’s advice to cut rates during a tariff shock, the biggest risk is unanchored inflation.
- Mechanism Analysis: Tariffs are essentially negative supply shocks (prices up, output down). The textbook response is to endure short-term inflation to avoid output collapse. However, with high deficits and labor shortages, stimulating demand via monetary easing can easily trigger a "wage-price spiral."
- Historical Mirror: This mirrors the Arthur Burns era of the 1970s, where the Fed prematurely loosened policy to aid Nixon’s election and offset oil shocks, leading to a decade of stagflation. Post-2026, the U.S. may see nominal growth appear strong while real purchasing power is eroded by inflation.
Asset Price Bubbles and Widening Inequality
The formation of the "Hassett Put" will reignite asset prices.
- Equities & Housing: Investors will anticipate the Fed bailing out the market at any sign of slowdown. This asymmetric reaction function will push stock (especially tech) and real estate valuations away from fundamentals.
- Social Impact: Asset inflation will further widen the wealth gap. The wealthy with assets will benefit from "asset inflation," while the working class will bear the pain of "cost-of-living inflation." This constitutes a paradox in Trump’s populist base: promising to help blue-collar workers while selecting a Fed Chair whose policies most benefit Wall Street.
Dollar Credibility and Fractures in the Global Financial System
The "Mar-a-Lago Accord" and financial repression will pose long-term challenges to the dollar's reserve status.
- Accelerated De-dollarization: If global central banks see the Fed intentionally devaluing the currency or tolerating high inflation to accommodate domestic fiscal needs, they will accelerate reserve diversification away from U.S. Treasuries.
- Market Volatility: A weak dollar policy could trigger competitive devaluation, causing severe volatility in global exchange markets and increasing uncertainty for cross-border trade and investment.
End of Institutional Independence?
Perhaps the most profound impact lies in the Fed institution itself. The Trump team attempts to redefine Fed independence through "transparency" (public code), "rules" (Taylor Rule), and "personnel infiltration" (appointing loyalists).
Once the market consensus forms that the Fed no longer has the political capital to say "no" to the President, the foundation of U.S. Treasuries as the global "risk-free asset" will shake. The Term Premium will permanently rise, meaning future generations of Americans may pay a higher real cost for government debt.
Conclusion
The 2026 Federal Reserve Chair selection is destined to be a watershed moment in U.S. economic history. It marks not just the exit of Jerome Powell, but a critical pivot from the "Neoliberal Central Bank Consensus" to "Statist Macroeconomic Management."
Kevin Hassett, as the frontrunner of this transition, represents the policy tools most aligned with the "3-3-3" plan: a central banker willing to tolerate inflation for growth, suppress rates for fiscal sustainability, and weaken the dollar for trade balance. Kevin Warsh represents an attempt to find a compromise between the old regime and new politics, though he may have to sacrifice some hawkish tenets to secure the position.
For investors and global economic observers, the post-2026 Fed will no longer be the familiar independent institution styling itself as an "inflation fighter." It will increasingly play the role of a National Balance Sheet Manager, with its primary mission quietly shifting from "price stability" to "Debt Monetization" and "Maximizing Nominal Growth." In this new era, low interest rates may be the norm, but they will be accompanied by higher inflation volatility, more fragile dollar credibility, and a more turbulent global financial order.
Sources
- Federal Reserve Board - Governor Christopher J. Waller Speech: "The Case for Cutting Now" August 28, 2025
- Federal Reserve Board - Stephen I. Miran Biography and Appointment Details September 16, 2025
- Hoover Institution - [Commanding Heights: The Federal Reserve at a Crossroads (Kevin Warsh)](https://www.hoover.org/sites/default/files/research/docs/Commanding Heights April 25 2025 DC.pdf) April 25, 2025
- U.S. Department of the Treasury - Secretary Scott Bessent Remarks: "Parallel Prosperity" and Treasury Market Strategy Late 2025
- The Heritage Foundation - Mandate for Leadership: The Conservative Promise (Project 2025) 2025
- Goldman Sachs Research - Top of Mind: Post-Election Economic Policies (Interviews with Kevin Hassett) 2024/2025
- Allianz Research - What to Watch: US Economic Policy and the 3-3-3 Plan November 28, 2024
- Merrill (Bank of America) - Viewpoint: The 3-3-3 Plan and the Path Forward December 2024
- Federal Reserve Bank of Kansas City - Monetary Policy in Chile: A Black Box? (Reference for Hassett's theoretical transparency views) Contextual Background