In short
Whether a “shadow Fed chair” (a successor-influencing chair before Jerome Powell’s term ends) could steer Federal Reserve policy, and how investors should interpret the likely rate path.
Guests
No guest is interviewed; host is Seth Carpenter, Morgan Stanley’s Global Chief Economist.
Key claims
Powell’s chair term expires May next year; Trump has pushed for more aggressive rate cuts. Markets price policy just above 3% by end of next year, but Morgan Stanley expects slightly lower. Even with a new chair in June, the FOMC’s group reaction function likely limits abrupt changes. A Fed board vacancy in January could let Powell’s successor join the FOMC early, creating “shadow chair” influence. Political risk is the bigger forecast threat than Fed mechanics.
Notable examples
Powell could remain on the board after stepping down (like Michael Barr did after vice-chair supervision). Legally, FOMC chair selection isn’t strictly required to match Board chair, though that’s unlikely.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOThe Shadow Chair Concept
0:18 to 2:18
Discussion on the potential successor to Fed Chair Jerome Powell and its implications.
“Fed Chair Jerome Powell's term expires in May of next year.”
Implications of a Shadow Chair
2:18 to 4:03
Exploration of how a shadow chair could influence Fed policies and market dynamics.
“successor is particularly vocal and signals a markedly different stance in policy.”
Political Factors and Fed Forecast
4:03 to 4:23
Analyzing the political landscape's influence on the Fed's economic forecast.
“For now, this shadow chair debate is more of a nuance than the primary narrative.”
Transcript
Automatic transcript. May contain errors.0:00Seth Carpenter:Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist, and today, well, there's a topic that's stirring up a lot of speculation on Wall Street and in Washington. It's this idea of a shadow Fed chair. It's Monday, July 21st at 2 p.m. in New York. Let's start with the basics. Fed Chair Jerome Powell's term expires in May of next year. And look at any newspaper that covers the economy or markets, and you will see that President Trump has been critical of monetary policy under Chair Powell. Those facts have led to a flurry of questions. Who might succeed Chair Powell?
0:36Seth Carpenter:When will we know? And maybe most importantly, how should investors think about these implications? President Trump has been clear in his messaging. He wants the Fed to cut rates more aggressively. But even though it seems clear that there will be a new chair in June of next year, market pricing suggests a policy rate of just above 3 % by the end of next year. That level is lower than the current Fed rate of 4.25 to 4.5, but not aggressively so. In fact, Morgan Stanley's base case is that the policy rate is going to be even a bit lower than market pricing suggests. So why this disconnect? First, although there are several names that have been floated by media sources, and the Secretary of the Treasury has said that a process to select the next chair has begun, we really just don't know who Powell's successor would be.
1:23Seth Carpenter:News reports suggest we will get a name by late summer, though. Another key point, from my perspective, is even when Powell's term as chair ends, the Fed's reaction function, which is to say how the Fed reacts to incoming economic data, well, it's probably not going to change overnight. The Federal Open Market Committee, or the FOMC, makes policy, and that policymaking is a group effort. And that group dynamic tends to restrain sudden shifts in policy. So even after Powell steps down, this internal dynamic could keep policy on a fairly steady course for a while. But some changes are surely coming.
2:00Seth Carpenter:First, there's a vacancy on the Fed board in January, and that seat could easily go to Powell's successor before the chair position officially changes. In other words, we might see what people are calling a shadow chair sitting on the FOMC influencing policy from the inside. Would that matter to markets? Possibly, especially if the successor is particularly vocal and signals a markedly different stance in policy. But again, the same committee dynamics that should keep policy steady so far might limit any other immediate shifts, even with an insider talking. As importantly, history suggests that political local appointees often shed their past affiliations once they take office, focusing instead on the Fed's dual mandate, maximum sustainable employment and stable prices.
2:47Seth Carpenter:But there are always quirky twists to most stories. Powell's seat on the board doesn't actually expire when his term as chair ends. Technically, he could stay on as a regular board member just like Michael Barr did after stepping down as the vice chair for supervision. Now, Powell hasn't commented on all of this, So for now, it's just a thought experiment. But here's another thought experiment. The FOMC is technically a separate agency from the Board of Governors. Now, by tradition, the chair of the board is picked by the FOMC to be chair of the FOMC, but that's not required by law. In one version of the world, in theory, the committee could choose someone else.
3:25Seth Carpenter:Would that happen? Well, I think that's unlikely. In my experience, the Fed is an institution that has valued orthodoxy and continuity, but it's just a reminder that rules aren't always quite as rigid as they seem. And regardless, the chair of the Fed always matters. While the FOMC votes on policy, the chair sets the tone, frames the debate, and often guides where consensus ends up. And over time, as new appointees join the board, the new chair's influence will only grow. Even the selection of Reserve Bank presidents is subject to a board veto, and that would give the chair indirect sway over the entire FOMC.
4:02Seth Carpenter:So where does all of this leave us? For now, this shadow chair debate is more of a nuance than the primary narrative. We don't expect the Fed's reaction function to change between now and May. But beyond that, the range of outcomes starts to widen more and more and more. Until then, I would say the bigger risk to our Fed forecast is in politics. It's our forecast for the economy. And on that front, we remain, as always, very humble. Well, thanks for listening. and if you enjoy this show, please leave us a review wherever you listen and share thoughts on the market with a friend or a colleague today.
4:38The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
As Fed Chair Jerome Powell’s term ends next year, our Global Chief Economist Seth Carpenter discusses the potential policy impact of a so-called “shadow Fed chair”.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Seth Carpenter, Morgan Stanley’s Global Chief Economist. And today – well, there’s a topic that’s stirring up a lot of speculation on Wall Street and in Washington. It’s this idea of a Shadow Fed Chair.
It’s Monday, July 21, at 2 PM in New York.
Let’s start with the basics. Fed Chair Jerome Powell’s term expires in May of next year. And look at any newspaper that covers the economy or markets, and you will see that President Trump has been critical of monetary policy under Chair Powell. Those facts have led to a flurry of questions: Who might succeed Chair Powell? When will we know? And—maybe most importantly—how should investors think about these implications?
President Trump has been clear in his messaging: he wants the Fed to cut rates more aggressively. But even though it seems clear that there will be a new Chair in June of next year, market pricing suggests a policy rate just above 3 percent by the end of next year. That level is lower than the current Fed rate of 4.25 [percent] to 4.50 [percent], but not aggressively so. In fact, Morgan Stanley’s base case is that the policy rate is going to be even a bit lower than market pricing suggests.
So why this disconnect?
First, although there are several names that have been floated by media sources, and the Secretary of the Treasury has said that a process to select the next Chair has begun, we really just don’t know who Powell’s successor would be. News reports suggest we will get a name by late summer though.
Another key point, from my perspective, is even when Powell’s term as Chair ends, the Fed’s reaction function—which is to say how the Fed reacts to incoming economic data—well, it’s probably not going to change overnight. The Federal Open Market Committee, or the FOMC, makes policy and that policy making is a group effort. And that group dynamic tends to restrain sudden shifts in policy. So, even after Powell steps down, this internal dynamic could keep policy on a fairly steady course for a while.
But some changes are surely coming.
First, there’s a vacancy on the Fed Board in January. And that seat could easily go to Powell’s successor—before the Chair position officially changes. In other words, we might see what people are calling a Shadow Chair, sitting on the FOMC, influencing policy from the inside.
Would that matter to markets?
Possibly. Especially if the successor is particularly vocal and signals a markedly different stance in policy. But again, the same committee dynamics that should keep policy steady so far might limit any other immediate shifts. Even with an insider talking. As importantly, history suggests that political appointees often shed their past affiliations once they take office, focusing instead on the Fed’s dual mandate: maximum sustainable employment and stable prices.
But there are always quirky twists to most stories: Powell’s seat on the Board doesn’t actually expire when his term as Chair ends. Technically, he could stay on as a regular Board member—just like Michael Barr did after stepping down as the Vice Chair for Supervision. Now Powell hasn’t commented on all this, so for now, it’s just a thought experiment.
But here’s another thought experiment: the FOMC is technically a separate agency from the Board of Governors. Now, by tradition, the chair of the board is picked by the FOMC to be chair of the FOMC, but that's not required by law. In one version of the world, in theory, the committee could choose someone else.
Would that happen? Well, I think that's unlikely. In my experience, the Fed is an institution that has valued orthodoxy and continuity. But it’s just a reminder that rules aren’t always quite as rigid as they seem. And regardless, the Chair of the Fed always matters. While the FOMC votes on policy, the Chair sets the tone, frames the debate, and often guides where consensus ends up. And over time, as new appointees join the Board, the new Chair’s influence will only grow. Even the selection of Reserve Bank Presidents is subject to a Board veto, and that would give the Chair indirect sway over the entire FOMC.
Where does all of this leave us?
For now, this Shadow Chair debate is more of a nuance than the primary narrative. We don’t expect the Fed’s reaction function to change between now and May. But beyond that, the range of outcomes starts to widen more and more and more.
Until then, I would say the bigger risk to our Fed forecast isn’t politics. It's our forecast for the economy—and on that front we remain, as always, very humble.
Well, thanks for listening. And if you enjoy the show, please leave us a review wherever you listen; and share Thoughts on the Market with a friend or colleague today.