Trump initiates plan to install a shadow Fed president

President Trump has started Operation Shadow Fed President, with news breaking Wednesday night that he has identified several candidates for the next Federal Reserve chairman. Under this strategy, the president selects a new Federal Reserve chair well before they can officially assume the role and they communicate new Fed policy to the markets, which undermines the current Fed chair.

According to the Wall Street Journal, the people being considered include former Fed Governor Kevin Warsh, National Economic Council Director Kevin Hassett, current Fed Governor Chris Waller, former World Bank Group President David Malpass and even Treasury Secretary Scott Bessent.

What does this mean for the future of mortgage rates? Let’s consider some scenarios.

The shadow Fed president goes on a media blitz campaign 

The main objective of the shadow Fed president is for Trump’s appointee to communicate to the market that significant changes will occur as soon as they assume the role of Federal Reserve Chair. This strategy undermines the influence of the current Fed Chair, Jerome Powell, who is expected to depart next year after his term is up.

Trump hopes that a dovish forward guidance will lead bond traders to lower the 10-year yield if these changes take place gradually. This doesn’t mean the 10-year yield is going to head toward 3.50% anytime soon, but it does prompt bond traders to start preparing for a more dovish Fed. I wrote about this potential strategy in April as Trump got more and more frustrated with Powell, yet is unable to fire him.

Labor data weakness will fuel dovish Fed language

A shadow Fed president will present a stronger backdrop for bond yields to go lower with weaker economic and labor data. Powell’s mindset of “let’s wait for labor conditions to deteriorate before taking action” will be fading soon, as the shadow Fed president will use the weakness in labor data to get even more dovish.

Powell has acknowledged that the Fed was late to start cutting rates in 2024 and has said the labor market is currently challenging for job seekers. With a new shadow Fed president in place, increased weakness in labor data could signal a green light for bond traders to buy more bonds, which would send mortgage rates lower. On Wednesday, the Fed also announced its proposal to ease regulations on financial institutions to allow them to hold more treasuries on their books. Treasury Secretary Bessent believes this can lower bond yields, which in turn will lower mortgage rates. 

Now, the markets have never considered Fed policy to be accommodative under Powell since he started the massive rate hike cycle in 2022. Since the Fed began its rate cut cycle, all the markets have focused on is what a neutral policy looks like and how long it will take to achieve it. Under a new shadow Fed president, the person might signal to bond traders to become more aggressive if the labor data is breaking, thus causing the 10-year yield to drop below what any of us would imagine under Powell’s leadership.

Wall Street starts to forecast much lower rates

In an unusual announcement, Morgan Stanley on Wednesday morning stated that they expect the Fed to deliver seven rate cuts in 2026, starting in March, which would bring the terminal rate to 2.5% to 2.75%. Now, at first glance, that sounds like a very bearish economic take on the economy to have so many rate cuts in the forecast.

Then I realized, what if Morgan Stanley recognized that the shadow Fed president was about to happen? With the Fed taking a more dovish stance, the rate cuts, which would take us down to 2.5%-2.75 %, don’t seem crazy at all. I mean, before Powell got super hawkish, he even said himself on TV that the Fed would like Fed policy to mirror 3-, 6-, and 12-month PCE inflation, which would mean 2.5%-2.75% Fed policy today.

Maybe housing gets some love?

The Fed hasn’t shown any interest in boosting housing demand, even though housing permits and starts have been in a recession for some time now. One possibility for the new shadow Fed is to discuss reviving the housing market. This would be a significant shift, as the Fed has largely ignored the weakness in housing for years, and this new policy would make many American consumers happy. This would be a win for Trump and his administration while also putting the country in a better mood.

Conclusion

We are in the early stages of Operation Shadow Fed President but these scenarios make sense to me. I’ll be doing an even deeper dive on the topic in the next episode of the HousingWire Daily podcast. I want to emphasize that labor data remains the key driver of mortgage rates and Federal Reserve policy. If the economy weakens over the next six months, the Fed will likely take action, even without a shadow Fed president in place. However, with this new variable in the equation, we can begin to approach things in a different way.