If the challenges of leading the Fed weren’t great enough, the next Fed chair faces an additional burden: a credibility problem posed by President Trump’s efforts to step in and exert a heavy hand on monetary policy.

Whoever emerges as the successful candidate is likely to stoke concerns that the Fed is only there to follow Trump’s dictates on interest rates, violating the central bank’s traditional veneer of apoliticality.



In order to exert greater influence in the short term, Trump is reportedly considering appointing a "shadow chairman" until current Chairman Powell steps down next year, in an attempt to pressure the Fed to cut interest rates.

This prospect leaves open a host of thorny questions.

Aside from the thorny issues raised by such an arrangement, it could be institutionally troublesome for the Fed and financial markets, which count on the central bank to make data-driven decisions without outside influence.

“Suddenly, everyone is talking about the ‘loss of independence’ of the Fed, and a new era of ‘fiscal dominance,’ ” Dario Perkins, senior European economist at TS Lombard, said in a note on Tuesday titled “Can We Trust the Next Fed Chair?” “Trump’s explicit linking of his demand for rate cuts to lower debt servicing costs has had no impact on this.”

In fact, Fed officials typically make decisions to achieve their dual goals, or “dual mandate,” of promoting either stable inflation or maximum employment.

What Trump has been asking for is different. He has been threatening Powell and his fellow Federal Open Market Committee officials with increasingly belligerent rhetoric, demanding that they cut interest rates to reduce the cost of financing the government’s growing debt load. Trump insists that the Fed could save taxpayers about $800 billion by slashing the overnight funds rate, which currently stands at 4.33%.

Powell and his predecessors have repeatedly said the state of public finances does not and will not play a role in interest rate decisions. Deviating from the Fed’s traditional decision-making parameters will raise more questions about the next chairman’s credibility.

“The real loser is not Powell but his successor,” Perkins wrote. “We don’t even know who that person is, and already have strong doubts about their integrity and what ‘deal’ they made to keep the job. But it seems fairly clear that Powell’s successor will tacitly cut rates.”