President Donald Trump wants “one thing” that should be “very simple,” he said during his recent visit to the Federal Reserve in Washington, D.C. He wants interest rates to come down by a lot, quickly.
He will get that, and probably much more, under the next Fed chair. To win Trump’s nomination and the Senate’s confirmation, the candidates in line to replace current Fed Chair Jerome Powell, whose term ends on May 15, 2026, are wrapping their proposals for interest-rate cuts in far-reaching plans for change. The result is likely to be an overhaul on a scale the Fed hasn’t seen in decades.
Changes on the table include re-examining the central bank’s fundamental mission, changing the way it thinks about inflation and interest rates, cutting staff, and reorganizing or even reducing the number of regional reserve banks.
Exactly how these changes will affect markets and the economy is difficult to project at this stage, in part because each of the candidates would put their own spin on any plans. But the structural changes coming to the Fed are likely to amplify the economic uncertainty that has marked the second Trump presidency. Economists and investors who have become accustomed to hearing the Fed chair deliver an analysis of the economy every six weeks or so will be in for something different—perhaps radically so.
Fed Gov. Adriana Kugler’s decision to step down ahead of schedule gives the president an immediate opening on the Fed’s board. With the ear of the president, a supportive Senate, and buoyant markets, the new Fed chair could begin rewiring the institution in just a matter of months. “Rate cuts are the place to begin. They’re not the place to end,” said Kevin Warsh, one of the prominent candidates to replace Powell, in a recent TV interview.
What needs to happen is nothing less than “regime change” at the Fed, Warsh said.
A Fed in Flux
The case for regime change depends on who is making it, but a broad critique of the Fed has emerged during the Powell era, which began in 2018. The Fed has grown from an institution narrowly focused on setting interest rates to one whose execution of monetary policy now supports fiscal policy and influences the U.S. economy in unintended ways, say opponents of its recent actions. The Fed’s giant asset purchases, most recently executed during the Covid-19 pandemic, have held down bond yields and enabled more government spending, while simultaneously lining Wall Street’s pockets. The central bank believes itself to be unaccountable to the president on monetary policy, even as it has made critical mistakes such as allowing Covid-era inflation to spike.
Fed officials have become economic sages of a sort, publicly rendering opinions about the course of the economy without committing to any particular economic theory. What the Powell Fed sees as institutional nimbleness and intellectual flexibility, its critics see as poorly disciplined thinking and overreliance on a powerful research staff. The problems have gone so deep that the entire institution needs to be overhauled, they argue.
Trump said during his July 24 visit to the Fed that he has “two people, maybe three” in mind for the next chair. Warsh, a former Fed governor who works with investor Stanley Druckenmiller, is one. Another is National Economic Council Director Kevin Hassett, an experienced macroeconomist who specializes in taxation and is a close ally of Trump’s. The Senate would probably easily confirm either of them.
The dark-horse candidates include Treasury Secretary Scott Bessent, who is frequently mentioned but has said he is happy with his current job. Sitting Fed Gov. Christopher Waller has said he supports cutting rates immediately and would take the job if the president offered it. “But he’s not talking to me,” Waller told Bloomberg on July 18.
Other possible contenders include former World Bank President David Malpass, recently confirmed Fed Vice Chair of Supervision Michelle Bowman, and prominent conservative economist Arthur Laffer. More may yet emerge.
Since taking charge, Powell has presided over a run-up in inflation that the Fed initially described as transitory, and a rapid run-up in rates has brought inflation back down, albeit not to the Fed’s 2% annual target. Powell’s defenders see the slide down in the consumer price index, from a peak of 9.1% in June 2022 to 2.7% in June 2025, all without a recession, as a legacy-defining success.
Meanwhile, the Fed’s balance sheet remains swollen at $6.7 trillion—but down from a peak of nearly $9 trillion after it conducted an emergency expansion during the Covid crisis.
The Fed’s staff has grown, too, to nearly 25,000 as of 2024, spread among the Washington D.C.–based Board of Governors and the 12 regional reserve banks. That reflects a rise of about 20% since 2010, according to research by Andrew Levin, a former Fed official now at Dartmouth College. Employment at other large federal agencies has fallen 9% in the same period, Levin found.
Powell said in May that he intends to reduce the Fed system’s staff by 10% over the next few years through attrition. “We are careful stewards of public resources, and sometimes you need to show that,” he later said, explaining the cuts.
A DOGE Moment for the Fed
Cuts of just 10% may not be enough to satisfy the Fed’s critics. “All these Ph.Ds over there, I don’t know what they do,” Bessent said in a recent CNBC interview. “This is like universal basic income for academic economists.”
Bessent also called for a review of the Fed’s non-monetary-policy operations, saying the Fed has experienced “mission creep and institutional growth” that have led to questions about whether it can stick to its core business of managing monetary policy.
Former Trump adviser Larry Kudlow made a similar demand recently on his Fox Business show. “Where is the downsizing? Where is the reforming? Where is the auditing of the Fed?” Kudlow asked his guest, Hassett, on July 10.
“I think that you’re right, Larry,” Hassett responded. “Government has gotten very big throughout Washington, and one of the places that hasn’t really responded yet to the downsizing we’re talking about is the Federal Reserve.”
The White House didn’t respond to requests to make Hassett available for an interview or to emailed questions. The Fed declined to comment.
The Fed’s Board of Governors would need to approve staff cuts, and it isn’t clear how far they might go. Still, caution is merited, said William English, a former senior official at the board who is now a professor of finance at Yale University. “I’m not sure that’s an experiment I’d want to run, how much can I cut before I really do damage to the institution,” English said.
An Audience of One
The candidates for Fed chair are conducting an informal campaign in financial TV studios and think-tank auditoriums, but ultimately they need to win Trump’s favor. “I do worry about a public campaign with an audience of one, and everybody knowing what it is that that audience wants to hear,” says former Sen. Pat Toomey, a Republican from Pennsylvania who was the ranking member of the Senate Banking Committee, which has jurisdiction over the Fed.
Trump’s campaign to bully Powell into lowering rates “happens to be the wrong outcome for this moment, in my view,” says Toomey. “But it also neglects the structural changes that I think are necessary.”
President Donald Trump presents Federal Reserve Chair Jerome Powell with what Trump called a list of cost overruns for the Federal Reserve’s $2.5 billion headquarters renovation project, on July 24. (Chip Somodevilla/Getty Images)
While in Congress from 2011 to 2023, Toomey pushed for legislation he argued would make the Fed more accountable. One bill would have cut the ranks of regional reserve banks from 12 to five, among other changes. The regional banks are quasi-private institutions whose directors choose their leadership, unlike Fed governors who are appointed by the president and confirmed by the Senate.
Warsh has been especially vocal about the change he wants to see at the Fed. He wants to see “regime change in how we’re thinking about inflation, how we’re conducting policy, how we’re communicating. It is also regime change in terms of how we’re supervising and regulating banks,” Warsh recently told CNBC.
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Making that happen will require, as he put it in another recent interview, “breaking some heads” at the Fed, “because the way they’ve been doing business is not working.” He believes that the Fed is allowing inflation to fester because it misunderstands what drives sustained price increases.
Changes to how the Fed thinks about inflation and conducts monetary policy would be consequential. The changes it makes to the federal-funds rate can spur or hinder lending, driving expansion or contraction across the economy. Its discretion in determining rates is the heart of its independence, and its power.
It’s also the source of some of the Fed critics’ loudest complaints. Instead of allowing market forces to set rates, they are “fixed by a committee where 12 people vote eight times a year on what should be the interest rate,” says economist Judy Shelton.
Shelton was nominated for a Fed governorship by Trump in 2020, during his first term, but the Senate voted against advancing her nomination. She remains close with many Senate Republicans.
Rewiring the Fed’s Policy Brain
The Fed has long since moved away from a “black box” approach to monetary policy, as former Chair Ben Bernanke described it, when Fed officials used economic rules linking interest rates to growth and inflation without a clear understanding of how policy transmitted throughout the economy.
The Fed under Powell and other recent chairs isn’t bound by any particular rule in making its policy decisions. Powell frequently refers to the Fed’s decisions as being “data dependent.” He is driven by a profound sense of caution about the risks to the economy of policy errors: Tighten too soon and you snuff out growth; too late, and you allow inflation to accelerate.
In a 2018 speech, Powell described the Fed’s job as “navigating by the stars,” a reference to economic variables such as the natural rate of inflation, or R*, known as R-star. The problem with those variables is that they can’t be observed directly and can change over time. After reviewing literature on uncertainty, Powell concluded, “no single, simple approach to monetary policy is likely to be appropriate across a broad range of plausible scenarios.”
That caution may have gotten the best of Powell and other Fed officials on the Federal Open Market Committee as post-Covid inflation took off. The Fed initially judged that Covid-driven price increases would quickly subside—they would be “transitory.” But waiting to be sure also meant that the Fed didn’t start raising interest rates until inflation was already well under way.
“There’s only two problems with data dependence, the data and the dependence,” Warsh said in a speech to central bankers in April.
Powell and his colleagues try to apprise the markets and the public of their thinking and strategy through news conferences, speeches, and published forecasts of officials’ estimates of future economic trends and interest rates. The Fed’s critics see those efforts as merely compounding the Fed’s mistakes. “The Fed should stop publishing its forecasts, and go back behind the curtain,” Hassett wrote in 2023.
Warsh would do away with them, too, saying they hurt the Fed’s ability to take in new facts.
Congress gave the Fed a “dual mandate” to ensure price stability and full employment, a pair of policy goals that in practice provide the Fed with significant discretion. A chapter in the Project 2025 policy agenda written by economist Paul Winfree and hailed by some conservatives urged the Fed to abandon the labor side of its dual mandate (that would require congressional approval). Winfree called for “major reform of the Federal Reserve’s core activity of manipulating interest rates and money,” which could be accomplished by returning to the gold standard, among other possibilities, in his view.
The Trump administration has said it had nothing to with drafting Project 2025, which is essentially a conservative policy wish list. But the section on the Fed endorses ideas drawn from a bubbling reform movement that is ready to seize the moment.
“President Trump’s focus on the renovation [of the Fed’s headquarters] is an attempt to put the Fed on the map for everyday Americans,” Winfree wrote in an email. He is president of the conservative Economic Policy Innovation Center.
The Return of Monetarism
Winfree’s chapter makes the case that the Fed has foolishly abandoned considerations of the size of the money supply in assessing inflation. That idea, known as monetarism, has a lot of support among the now-ascendant Fed reformers. They often make reference to economist Milton Friedman’s claim that “inflation is always and everywhere a monetary phenomenon,” a view that can be oversimplified to mean that printing too much money raises prices.
To a prominent set of Friedman’s modern-day acolytes, quantitative easing is the Fed’s greatest sin. That program was created in stages after the 2008-09 financial crisis and saw the Fed purchase trillions in Treasury securities, and later, certain mortgage securities, to help keep markets functioning and boost banking activity in times of stress. The effectiveness of the program is much debated even among the Fed’s defenders.
To the Fed’s critics, its effects are obvious: Trillions of dollars in new money has produced sharply higher inflation. Hassett, then working at a Washington, D.C., think tank, signed a 2010 open letter along with other prominent economists opposing the start of quantitative easing. It cited the risk of “currency debasement and inflation.”
Warsh, who was on the FOMC when the program was created, defends it as an emergency measure but says the Fed should have wound it down when the financial crisis ended. Tapering the Fed’s assets now would help it ease inflation, he argues, a position he describes as “practical monetarism.”
Powell’s defenders see the idea of a return to monetarism as somewhere between a benign distraction and a dangerous risk that might lead the Fed to needlessly overtighten monetary policy and prompt a recession. “On the issue of monetarism, Milton Friedman won the war but lost the battle,” says Frederic Mishkin, a former Fed governor who served with Warsh.
The End of Fed Unity
Trump’s choice of chair may not only usher in reforms to the Fed’s mission and structure, but also disrupt the operations of an institution that has prided itself on consensus. For critics who fear that the next Fed chair will simply dictate Trump’s wishes, the crucial question is, can the chair yoke the FOMC to his will?
“The chair has a lot of power in the sense that they set the agenda for FOMC meetings,” says Bill Dudley, a former president of the New York Fed and vice chair of the FOMC.
A particularly persuasive chair, like Greenspan, can use that agenda-setting power to bring the committee along when it is skeptical of his views. “But in terms of the actual monetary-policy decision, the chair can’t force the policy decision on the committee,” says Dudley.
Were the chair to attempt to force analytical conclusions on the staff, “at that point you just start having an exodus of talent out of the Federal Reserve,” he says.
Turmoil at the Fed would rile financial markets. The dollar sold off by nearly 9% in the first half of the year as global investors adjusted for the risk of institutional instability in the U.S. Changes at the Fed could reignite those trends.
Imagine that the next Fed chair attempts to take Trump’s rate-cutting demands at his word, says Alan Blinder, a former Fed vice chair who teaches economics at Princeton University. A new chair may succeed in pushing through a quarter-point cut, but Trump is demanding that the federal-funds rate come down three full percentage points. “I can well imagine a vote on the FOMC where there are nine or 10 dissents, and the chairman loses the vote,” Blinder says. “That in turn could cause pretty big reactions in the markets.”
Inflation expectations would rise, bringing interest rates up with them.
Dissents among FOMC voting members are “rare, and therefore loud,” Blinder says. “The Fed has often thought it important to speak and vote with one voice.”
From left: Federal Reserve Gov. Christopher Waller, Federal Reserve System Vice Chair Philip Jefferson, Fed Chairman Jerome Powell, Fed Vice Chair for Supervision Michelle Bowman, and Fed Gov. Lisa Cook, during a Fed Listens event in Washington, D.C., on March 22, 2024. (Al Drago/Bloomberg)
Trump’s appointment could end that, opening up a challenging new era in which the Fed is less predictable. The just-concluded July meeting saw the first two dissents by Fed governors since 1993. Bessent, the Treasury secretary, described it as a schism and sign that with just two more votes, Trump-aligned voices could have a majority of the board’s seven governors. (They could still be overruled with support of the regional bank presidents.)
Another unusual scenario could also unfold, Blinder notes. The Senate-confirmed Fed chair acts as the CEO of the Fed’s board of governors, but that position is technically distinct from the chair of the FOMC, which has the power to set rates. The FOMC chair “is always the chairman of the Fed, but it doesn’t have to be. It’s not in the law, it’s not in the rules, or anything like that,” says Blinder.
Were the Fed chair to be consistently in the minority on monetary-policy decisions, the other board members could seize power for themselves and appoint a new FOMC chair.
“I think there are very few people in the markets who know that fact,” Blinder says.
How it would play out is impossible to predict.
And that may be the biggest change that Trump will bring to the Fed. The U.S. central bank is set to transform into something resembling the modern-day Supreme Court, where polarized rulings have become the norm. Control of the FOMC seats would become an object of partisan warfare. Trump is scheduled to have only two appointments during his term, raising the stakes in the election to succeed him, much as the open Supreme Court seat in 2016 galvanized Republicans.
The Fed is a creation of the political system, and can be changed by it. And starting on May 16, 2026, someone new will have the chance to do just that.
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