What does the nomination of a new Fed chair mean for economy?
Terry Herr, CFP®
What does the nomination of a new Fed chair mean for economy?
The Federal Reserve plays a crucial role in the economy by setting monetary policy and interest rates, so changes in leadership naturally create uncertainty. Here are some relevant facts informed by history:
- On January 30, President Trump announced his intention to nominate Kevin Warsh as the next Fed chair. He would succeed Jerome Powell whose term expires in mid-May. Warsh served on the Fed's board during the global financial crisis and has gained a reputation as an inflation hawk, although he has recently aligned with views that the Fed should cut rates faster. Upon his official nomination, Warsh would still need to be confirmed by the Senate.
- There are also two ongoing court cases and investigations by the Department of Justice into Powell and Lisa Cook, another Fed governor, that could complicate the Senate debate. Once Powell's term as Chair ends, he could choose to stay on as a Fed governor until the end of January 2028. However, his predecessors, including Ben Bernanke and Janet Yellen, did not choose to do so. If he left, this could create one additional vacancy for another White House nomination.
- In general, lower interest rates help to support the economy and labor market. The Fed primarily controls very short-term rates through the fed funds rate, while long-term rates are influenced by many factors including economic growth and inflation expectations. In theory, cutting rates too aggressively could actually raise inflation concerns and push long-term rates higher, steepening the yield curve.
- While the Fed is a central part of the economic and market discussion, history shows that markets have performed well through many different monetary policy environments and political climates. This is partly because the Fed is often responding to economic trends, rather than driving them. This is also because the Fed tends to operate by consensus. While the Chair is an important voice, they cannot single-handedly determine policy.
- There was little immediate change to fed funds futures following the announcement. At the moment, market expectations are for one additional rate cut in July and possibly two across 2026. These expectations can change quickly, and many anticipate short-term rates to be lower once a newly appointed Chair is in office.
The included chart shows the economy has grown steadily across different Fed chairs and administrations, demonstrating that long-term economic trends tend to persist despite leadership changes. While new leadership may bring policy adjustments, the fundamental drivers of economic growth remain consistent over time. The key takeaway is that maintaining a disciplined, long-term investment approach is still the best way to navigate periods of leadership transition and policy uncertainty.
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