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After the Federal Reserve scrapped some of its climate rules earlier this month, governor Christopher Waller’s response was short and swift.
“Good riddance,” the top internal candidate to replace Jay Powell said in a two-word statement.
It was the sort of ruthlessness US Treasury secretary Scott Bessent, who is leading the hunt to find Powell’s successor, wants to see from the next Fed chair.
With the second round of Treasury interviews scheduled for the coming weeks, Bessent has honed the focus of a drawn out process. The goal is a leaner and meaner central bank.
Bessent’s approach involves more than ditching environmental standards and trimming staff — steps Powell has taken.
He wants the Fed to be much less active in managing the US economy and to rein in the mass purchases of government debt it has carried out since the 2008 financial crisis. He also wants to slim down the network of 12 regional banks that make up the Fed system.
Bessent’s effort to fix what he terms “mission creep” has “made the conversation a lot more palatable to markets”, said Vincent Reinhart, a former Fed official who is now chief economist at BNY Investments. It has helped calm investors who have shown jitters about the White House’s attempts to force through rate cuts and fire officials, such as governor Lisa Cook.
On Tuesday, Trump was so full of praise for Bessent and his ability to “clean it all up” that he suggested he might pick him to be Fed chair.
“He soothes the markets — I don’t soothe the markets,” Trump said. “I sometimes disturb the markets.”
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The other candidates in the race for the big job are emulating Bessent’s approach — at least where the Fed is concerned.
“What’s striking is how much some of the candidates are talking about revamping the Fed’s governance structure and shifting to a smaller, and less active central bank,” said Aditi Sahasrabuddhe at Brown University. “Bessent seems to have steered the conversation beyond Trump’s calls for low interest rates and is more focused on reforming how the Fed does their job.”
The Treasury plans to hand Trump a shortlist between Thanksgiving and Christmas. The Fed’s final rate-setting meeting of the year is on December 10, potentially leaving the two candidates — Waller and vice-chair for supervision Michelle Bowman — casting their vote before they know their fate.
Trump and Bessent think interest rates are far too high.
Internally, Waller and Bowman have led calls for cuts, though at a slower pace than the White House wants. Both have also taken actions in line with the president’s economic agenda and agree the central bank should leave a smaller footprint in financial markets.
Bowman is easing regulatory requirements for US banks, with rule changes that have freed up $2.6tn in lending capacity, according to consultants Alvarez & Marsal.
While the vice-chair has assured global regulators that the Fed will enforce the so-called Basel endgame global capital rules, it has pulled back on joint initiatives in areas such as climate.
Waller does not think the Fed should radically shrink its balance sheet — a move that Bessent seemed to favour, but has recently backed away from.
Since 2023, he has been known internally for efforts to trim regional Fed branches’ resources, centralising operations in Washington, and cutting about 350 reserve bank jobs.
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Some of the candidates share Bessent’s view that quantitative easing — when the Fed buys assets such as bonds to push cash into the economy during times of stress — is best suited to fighting crises and should not form part of its normal policy arsenal. Others also subscribe to Bessent’s opinion that the Fed has hogged too much of the limelight.
Measures such as QE have left markets hanging on Fed officials’ every word. Some of those in the race would prefer US central bankers to speak less, conduct fewer press conferences, and hold fewer meetings than the eight a year they have now.
Kevin Warsh, the former Fed governor who has become a frequent critic of the central bank, has voiced similar concerns to Bessent. He believes QE made the bank’s balance sheet too large and blurred the lines between what it and its political masters were doing.
Warsh, who appeals to Trump’s desire for a telegenic Fed head, has raised eyebrows among economists and former officials for suggesting he could shrink the central bank’s balance sheet and cut rates at the same time — a move that would tighten and ease monetary conditions at the same time.
Rick Rieder, the BlackRock chief investment officer for global fixed income who was the surprise pick from the first round, has said less about how he would reform the central bank.
But, like Bessent and other administration officials, Rieder’s desire for deep rate cuts does not make him any less bullish about economic growth. He said this month he expected strong growth in the third quarter thanks to an artificial intelligence-induced boom in stocks.
The candidate who has said the least about how he would revamp the Fed is the one many consider the favourite — National Economic Council head Kevin Hassett.
However, Hassett possesses a quality that may hold more sway than balance sheet policies to Trump — loyalty.
Reinhart said: “I don’t know how much of what matters to the Treasury matters to the White House. It looks like an organised process but it won’t necessarily look like that once it gets to the Oval Office.”
Data visualisation by Ian Hodgson, Carolina Vargas and Chris Giles
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