Interest Rate Changes Could Be on the Way if Fed Chair Goes to the Newest Frontrunner

The new front-runner to become the nation’s next top banker could be less inclined to steeply cut interest rates than his closest rival.

On Friday, gamblers on betting markets sharply raised the odds that President Donald Trump would nominate former Federal Reserve Governor Kevin Warsh to be the next Fed chair. Earlier in the day, Trump cast doubt on whether he would nominate Warsh’s closest competitor for the job, National Economic Council Director Kevin Hassett.

As of Friday afternoon, Polymarket was pricing in a 60% chance Warsh would win the job, and just a 15% chance for Hassett. Hassett’s odds plunged after Trump praised his economic advisor at a health care event Friday.

“You were fantastic on television today,” Trump told Hassett during the president’s public comments at the White House. “I actually want to keep you where you are if you want to know the truth.”

Hassett May Be Most Aggressive Rate-Cutter Among Likely Candidates

Current Fed Chair Jerome Powell’s term expires in May and Trump has said he will announce his nominee for the position before then.

The selection could significantly affect the Federal Reserve’s monetary policy and future levels of the fed funds rate, which in turn influence borrowing costs for all kinds of loans. The independence of the central bank from White House control is also at stake, and with it, its credibility for keeping inflation under control.

Hassett has joined Trump in advocating for steep rate cuts. Some experts considered him the most likely among the people floated for Fed chair to toe Trump’s line and push the central bank to slash rates.

“In our view, Hassett would likely bring the greatest risk of politicization at the Fed,” David Seif, chief economist at Nomura, wrote in a commentary in October. “Hassett is widely viewed as a Trump loyalist and has consistently supported the president as an advisor in both his first and second terms.”

Warsh, a lawyer and banker, has also appeared on television, praising Trump’s policies and advocating for rate cuts.

“We can lower interest rates a lot,” Warsh said on Fox News in October.

However, he may not be as “dovish” or as inclined toward rate cuts as Hassett.

“Although Warsh has argued for lower rates recently, we do not view him as structurally dovish,” Matthew Luzzetti, chief economist at Deutsche Bank, wrote in a commentary in December.

The New Fed Chair’s Difficult Job

The new Fed chair will take charge of the central bank at a crucial moment for the economy, assuming they are confirmed by the Senate.

Members of the Fed’s 12-person policy committee that votes on interest rates have been divided. They are trying to decide whether to cut rates to support the faltering job market or keep them higher for longer to fight inflation that’s running above the Fed’s 2% annual target.

In recent months, the job market has slowed down significantly while inflation has remained stubbornly high, pulling the FOMC in opposite directions. The new Fed chair will take over that balancing act from Powell, who has led the Fed to cut interest rates by three-quarters of a point over its last three meetings—fewer rate cuts than Trump would prefer.

Fed officials are widely expected to keep interest rates steady at the next meeting later this month, and it’s an open question whether any more rate cuts are coming this year.

Fed chairs are influential in policy decisions, but don’t make them singlehandedly, and must win over a majority of the Federal Open Market Committee to their position. That job will be complicated by political tensions: Trump’s demands for steep interest rate cuts, as well as his administration’s criminal investigation into members of the committee, have raised alarms among Fed officials and lawmakers about the central bank’s independence from White House control.

Fed officials and economists have warned that if Trump and future presidents successfully pressure the central bank to sharply cut interest rates, the public would begin to doubt the central bank’s ability to control inflation—a belief that could become a self-fulfilling prophecy.

As a result, the new Fed chair may face pressure not to cut rates simply to prove the Fed’s inflation-fighting credibility.

“Regardless of President Trump’s choice, the market could look to test the next Fed chair’s independence and the credibility of his commitment to achieving the inflation target,” Lutezzi wrote. “These bona fides always need to be earned by an incoming chair.”