We've talked about the "shadow Fed" that has emerged over the past month. With that, despite a 9-2 vote in favor of holding rates last week, the market is now beginning to price in the chance for three quarter point cuts by year end.
And the 9-2 vote to hold rates steady last week would have been 10-2, had Fed governor Kugler voted. She was "absent" — didn't vote. And two days later handed in her resignation.
With that, Trump will get to nominate a new Fed governor. And he says he will name his Fed Chair nominee, to replace Jerome Powell, by the end of the week.
The current National Economic Council Director, Kevin Hassett, has become the favored pick in the betting markets.
Hassett makes sense. He's already inside the White House. He's a trusted member of the Trump team, and has the respect of Trump and Scott Bessent.
As for Kugler's replacement, it may be Judy Shelton. If so, that would signal to markets that Trump is looking to overhaul the Fed — true regime change.
She's a Fed reformist. Her views align closely with Bessent's "Fed review" initiative. She's also aligned with Bessent's Main Street over Wall Street focus. She's a sound money advocate. And she opposes use of tools like QE and forward guidance.
On the latter, this is where it gets interesting in this Fed regime change story.
It's important to note, since the Great Financial Crisis, the major global central banks have done nearly everything in coordination. And they continue to coordinate and collaborate.
It's the only way that a major economic price wasn't paid for the global fiscal profligacy that led to the financial crisis (consumer, business and sovereign). They've absorbed the shocks with QE, and with whatever forms of intervention have been necessary. And they've had each others backs — importantly, led by the Fed.
So, the post-GFC central banking policy is well described in this graphic …
Central bank intervention, in the name of "maintaining stability in the financial system," has only led to more control and more intervention by central banks – a never ending game of plugging new leaks in the global financial system.
With this in mind, a regime change at the Fed would mean the era of coordinated global monetary policy is likely over.
With that, the focus would quickly turn to Europe, where fragile sovereign debt markets have been explicitly backstopped by the European Central Bank since the summer of 2022.
If the Fed no longer has the European Central Bank's back, then the ability of the ECB to backstop European sovereign debt will be tested.
And it probably won't go well. Remember, these EU member states have large scale deficit spending coming down the pike, to fund defense and AI commitments. And the ECB will be, almost certaintly, back in action to tame the bond yields of the fiscally vulnerable countries. Without global coordination, the will lack the firepower.
