The Federal Reserve (FED) earthquake! Trump nominates a replacement for Powell "before the end of the year", with the shortlist revealed early.

According to a report by Wall Street Journal reporter Nick Timiraos, U.S. President Trump stated on Monday that he may announce his nominee to replace Federal Reserve Chairman Powell by the end of the year. Powell's term will end in May next year, and the candidate pool has already been narrowed down to five final candidates. Treasury Secretary Basant plans to conduct a second round of interviews with the candidates next month, followed by submitting a more streamlined list.

The list of the top five is out, dual-track competition between the White House and Wall Street

Besenet revealed on Monday that the five finalists include two current board members who were initially nominated by Trump to the Federal Reserve Board: Christopher Waller and Michelle Bowman, who also serves as the Vice Chair for Bank Supervision. Besenet's and Trump's aforementioned statements were made to accompanying reporters on “Air Force One.”

Currently, two candidates are widely seen as frontrunners: Kevin Hassett, Director of the National Economic Council at the White House, and Kevin Warsh, former member of the Federal Reserve. The fifth candidate on the list is Rick Rieder, a senior executive at BlackRock, who oversees the company's large bond business. The composition of this list shows that the candidates come from two different camps: economic policymakers from within the White House and asset management professionals from Wall Street.

Kevin Hassett, as the Chairman of the White House Council of Economic Advisers, has the closest relationship with Trump. He served as the Chairman of the Council of Economic Advisers during Trump's first term and was one of the core architects of Trump's economic policy. Hassett supports tax cuts, deregulation, and loose monetary policy, which align closely with Trump's economic philosophy. If Hassett were to assume the position of Chairman of the Federal Reserve (FED), the market generally expects a more accommodative monetary policy.

Kevin Warsh was a governor of The Federal Reserve (FED) and participated in decision-making during the financial crisis of 2008, possessing rich experience in central banking. Warsh has a good reputation on Wall Street and is seen as a moderate between the policy hawks and doves. He also has a close relationship with Trump and was considered as a candidate for the chair of The Federal Reserve (FED) during the first term. Warsh's strength lies in his central banking experience and good relationships in both the political and financial realms.

Background and Characteristics of the Five Strong Candidates:

Kevin Hassett: Director of the White House Council of Economic Advisers, a confidant of Trump, supports loose monetary policy.

Kevin Warsh: Former member of the Federal Reserve, well-respected on Wall Street, moderate stance.

Christopher Waller: Current board member, nominated by Trump, professional economist

Michelle Bowman: Current Board Member and Vice Chair for Bank Supervision, nominated by Trump, with extensive regulatory experience.

Rick Reed: BlackRock's bond chief, Wall Street representative, bond market expert.

The selection of Rick Reed was the most surprising. As the head of the bond business at BlackRock, Reed oversees more than $2 trillion in bond assets. His expertise in the bond market is impeccable, but he lacks experience working in a central bank or government sector. According to informed sources, Reed impressed Bassett during their initial discussions about the position this summer. If Reed is selected, it would be a rare case of Wall Street directly entering the highest levels of the Federal Reserve (FED).

Besant did not rule out himself, announcing in advance that both advantages and disadvantages exist

Trump had previously stated that he was not considering Bensent for the position, and on Monday he reiterated this point of view. However, several individuals who have communicated with Bensent revealed that if Trump is not satisfied with other candidates, Bensent could still be a potential contender for the position. This reserved attitude indicates that, despite publicly ruling him out, Bensent is still within Trump's consideration.

Apart from Bessen, Waller and Hassett have the closest relationship with Trump. Many Federal Reserve observers believe this will be a key factor in Trump’s most influential personnel decision during his remaining term. The chairman of the Federal Reserve not only controls U.S. monetary policy, but their statements and decisions also impact global financial markets. A dovish chairman may push for more aggressive rate cuts and easing policies, while a hawkish chairman may prioritize controlling inflation.

Trump had previously indicated that he was considering Hassett, Waller, and Walsh for the position. The Wall Street Journal had reported earlier that this summer, dissatisfied with Powell's refusal to cut rates, Trump contemplated announcing a successor in September or October. However, the situation took a turn in August—Adriana Kugler, appointed by former President Biden, resigned from her board position about six months early, unexpectedly creating a vacancy for the White House. The Senate confirmed Stephen Miran, Trump's economic advisor, for the position in September.

At the same time, Bessent launched a strategy to delay the nomination process for the new chairman, conducting interviews with the 11 candidates announced by the media. This very public selection process prompted several candidates to join the debate on monetary policy, and Bessent used this to amplify the argument in favor of the Federal Reserve strengthening interest rate cuts. The Federal Reserve cut rates by 25 basis points in September, but Milan disagreed, advocating for a larger cut of 50 basis points. The market widely expects the Federal Reserve to cut rates again by 25 basis points during the two-day meeting that ends on Wednesday.

Political calculations and market impact announced in advance

Traditionally, the White House usually announces the new chairperson of the Federal Reserve (FED) three or four months before the term of the current chairperson expires. Announcing in advance allows the incoming chairperson to guide market expectations regarding the interest rate path. However, Trump is considering making an announcement before the end of the year, which means it would be about five months earlier than usual, and this unusually early timeline has sparked widespread discussion.

The advantage of an early announcement lies in seizing the discourse. Once the incoming chairman is confirmed, the market will begin to focus on their policy stance and past statements, which will affect interest rate expectations and asset prices. Trump, through the early announcement, can start shaping market expectations even before Powell steps down, weakening the influence of the current chairman. Furthermore, an early announcement also gives the Senate more time to conduct confirmation hearings, reducing the uncertainty of the transition period.

But an unusually early nomination has drawbacks: Powell's successor may find themselves in a dilemma—publicly questioning the decisions of future colleagues or defending the Federal Reserve's current policies and angering Trump. While interest rate decisions are led by the chair, they must be jointly agreed upon by the 12-member Federal Open Market Committee, which includes seven governors appointed by the president and five rotating regional Federal Reserve Bank presidents. If the incoming chair starts criticizing policies during Powell's term, it will undermine the Federal Reserve's internal unity and external credibility.

The Federal Reserve (FED) chairman nominated by Trump is likely to succeed the current FED board member in Milan. Milan's term will end in January, but he can remain in office until his successor is confirmed by the Senate. This will allow the future FED chairman to participate in the interest rate decision meetings in March and April next year, paving the way for their official term starting in mid-May. This arrangement allows the incoming chairman to familiarize themselves with the policy-making process before officially taking office, reducing the uncertainty of the power transition.

For the financial market, the change of the chairman of the Federal Reserve (FED) is a significant event. The policy preferences of different chairpersons can significantly affect interest rate paths, the USD exchange rate, and asset prices. If the market expects the new chairman to adopt a more accommodative policy, it could drive up stocks and Bitcoin while weakening the USD. Conversely, if the new chairman is perceived to be more hawkish, the market may adjust expectations in advance, triggering fluctuations in asset prices.