Riedel and Waller, 2 choose 1? Trump "wants both," the candidate for the new chairman of the Federal Reserve changes

Trump's "perfect standard" for the Federal Reserve Chair candidate is facing real challenges. He hopes to find a candidate who is loyal to the White House, can gain market trust, and drive down long-term borrowing costs, but such a "unicorn" may not exist. As two popular candidates, Kevin Hassett and Kevin Warsh, reveal significant shortcomings, BlackRock executive Rick Rieder and Federal Reserve Governor Christopher Waller are becoming more viable options.

Trump stated this Wednesday during the World Economic Forum in Davos that the list of Federal Reserve Chair candidates has been narrowed down to "possibly just one," although he refused to disclose the specific candidate. The U.S. President expressed that he hopes the selected Federal Reserve Chair can be like former Chair Alan Greenspan, and mentioned that BlackRock's Rieder and former Federal Reserve Governor Warsh are both good candidates.

According to Bloomberg on Thursday, Trump seems to be searching for an "elusive unicorn": a loyalist who can attract the President's political base, navigate the Senate confirmation process, and possess market credibility to lower long-term borrowing costs. However, such a candidate may not exist, at least not among the two "Kevins"—the leading candidates in the betting markets.

Bloomberg's perspective suggests that through the process of elimination, only two viable candidates remain: Rick Rieder, viewed as a "globalist" in the bond market, and Christopher Waller, a "Fed establishment figure."

The Two "Kevins" Each Have Fatal Shortcomings

National Economic Council Director Kevin Hassett has long been seen as a popular candidate, regarded as a staunch Trump loyalist, but investors doubt whether he has the backbone to uphold the Federal Reserve's tradition of independence and tackle the daunting task of curbing inflation.

This month, after the government threatened current Chair Powell with the Justice Department, market skepticism towards Hassett seems to have deepened. Trump himself remarked to Hassett at a White House event last week, "To be honest, I actually want you to stay in your current position." This seems to diminish Hassett's chances.

Meanwhile, the currently leading candidate in the betting markets, Kevin Warsh, is far from Trump's "perfect combination." Although he has recently made media appearances to please the Trump White House, Warsh is essentially a lifelong hawk and a staunch critic of quantitative easing, making it unlikely that he can fulfill Trump's desire for significant cuts in policy interest rates. His free-market conservative ideology at the Hoover Institution is more aligned with the early days of the Republican Party than with the MAGA populism represented by Trump.

Rieder: The "Globalist" of the Bond Market

Rick Rieder is the Chief Investment Officer of Global Fixed Income at BlackRock, and the support for this dark horse candidate has surged recently. It is reported that Rieder's interview with Trump last Thursday went smoothly, and the betting market currently gives him the second-highest probability of success, just behind Warsh. He is seen as a respected insider in the market, understanding the mechanisms of market operations, and may gain Senate support In comments from BlackRock, Rieder has been advocating for a loosening of monetary policy in recent months, although his reasoning is more economically sound than that often presented by the presidential team. He believes that the labor market poses a greater risk than inflation and states that tightening policies could have unexpected distribution effects, such as stimulating consumption among wealthy asset owners while harming small businesses and young workers. In a report dated December 10 of last year, he wrote: "This puts Federal Reserve policymakers in a challenging position, and we have long believed that the policy interest rate tool is too rigid to address issues that could be better resolved through fiscal channels."

However, Rieder would be an unconventional choice. He is the only candidate who has not worked at the Federal Reserve and is one of two candidates without a Ph.D. in economics. His closest experience with monetary policy-making is serving as a member of the New York Fed's Financial Markets Investor Advisory Committee. From a political perspective, Trump's MAGA allies may be dissatisfied with his association with the world's largest asset management firm, which they label as a "globalist" financial institution and accuse of promoting the spread of ESG investments.

Waller: An Unexpected Advantage for the Fed's "Establishment"

If Trump's disappointment with the two Kevins leads him to default to the current Federal Reserve Governor Waller, it would be one of the luckiest developments for his administration. Waller has served as a member of the Federal Reserve Board since 2020 and holds deep respect for the institution. Since inflation became a focal point in 2021, he has demonstrated exceptional policy intuition. In 2022, he correctly argued how the Federal Reserve could combat inflation with high interest rates without triggering a recession. Recently, his thought leadership has helped the committee prepare for a series of risk management rate cuts this year, as he hopes to continue lowering rates to protect the labor market.

Waller aligns with the president on the direction of interest rates, but his reasoning is sound, and he has earned credibility to help accomplish the task of combating inflation and lowering long-term borrowing costs. He is the candidate Trump does not know he wants. But he is also a staunch supporter of the existing establishment, which could anger a president determined to shake up the world's most important central bank. If he does not get the job, it is because Waller is clearly unwilling to serve as Trump's pawn to lead this independent central bank.

Bloomberg Opinion points out that the White House's hasty decision on this key appointment is clearly a regret, especially with four months left in Powell's term. However, both Waller and Rieder are strong choices, far superior to other candidates. If the administration accidentally selects one of them due to its own chaotic and rushed process, it would be a fortunate outcome for the markets and the American people.

Warsh Advocates Aggressive Balance Sheet Reduction, Rieder Takes a More Cautious Stance

As investors await Trump's nomination of the next Federal Reserve chair, a key question is emerging—how will the candidates manage the Federal Reserve's balance sheet, which stands at $6.6 trillion?

Kevin Warsh has been critical of the Fed's current strategy, strongly advocating for a reduction in the balance sheet size, while BlackRock executive Rick Rieder has stated that the Fed should stop reducing its holdings to avoid turmoil in the funding markets Warsh's criticism of the Federal Reserve's more aggressive use of its balance sheet has persisted for over 15 years. Wells Fargo strategist Angelo Manolatos pointed out, "A key differentiating feature of Warsh is his strong support for shrinking the Federal Reserve's balance sheet."

In speeches over the past year, Warsh has argued that years of aggressive bond purchases have gone too far, potentially dragging the Federal Reserve into "the chaotic political affair of fiscal policy." He supported the initial bond purchase program after the 2008 global financial crisis but later warned that restarting purchases could trigger inflation and distort market signals.

More broadly, Warsh believes that by artificially keeping interest rates low for an extended period, the Federal Reserve has fueled the accumulation of U.S. government debt and encouraged what he calls a "monetary dominance" form, where financial markets become overly reliant on central bank support