Trump continues to fight Bauer! "Shadow Fed Chairman" Hassett: There is plenty of room for interest rate cuts

Kevin Hassett, director of the National Economic Council, said at the Wall Street Journal CEO Council event that there is “ample room” for rate cuts in the coming months, and that the rate cut could exceed the current expectation of 0.25%, a position consistent with President Trump’s call to reduce borrowing costs. Hassett is seen as a popular successor to current Fed Chairman Powell, who will serve until May next year. Trump criticized Powell for showing reluctance to cut interest rates and hinted at a desire to fire him during his second term.

Trump and Powell’s Battle for Interest Rate Cuts

Trump’s conflict with current Federal Reserve Chairman Jerome Powell has become public. In an interview with Politico, Trump made it clear on Tuesday that he hopes the next Fed chairman will commit to cutting interest rates. This public statement is extremely rare in the American political tradition, as the Federal Reserve is seen as an independent institution from the executive branch, and the president usually avoids direct intervention in monetary policy.

Trump’s dissatisfaction with Bauer stems from the latter’s cautious approach at critical moments. Although inflation has fallen from its peak, the Federal Open Market Committee (FOMC) led by Powell has reservations about significant rate cuts, fearing that premature easing of monetary policy could reignite inflation. However, Trump believes that this caution has hurt economic growth and employment, especially in interest rate-sensitive industries such as manufacturing and real estate.

Trump had hinted at a desire to fire Powell during his second term, but Treasury Secretary Scott Bescent opposed the move. Under Fed law, the president does not have the power to dismiss the Fed chairman during his term unless there is a “good cause” (such as malfeasance or a crime) involved, and policy differences do not constitute grounds for dismissal. Therefore, Trump’s actual strategy is to wait for Chairman Powell’s term to expire in May before appointing a successor who aligns with his position.

Hassett’s Two-Faced Role: Independence and Stance Consistency

Hassett’s statement at the Wall Street Journal event demonstrated a delicate balancing act. When asked how he would react if Trump posted on Truth Social instructing him to cut interest rates, Hassett said: “You just have to do the right thing.” He gave an example: “Assuming inflation rises from 2.5% to 4%, you can’t cut interest rates.” He emphasized that he would rely on the “judgment” and “firm commitment, non-partisan” that he believes the president trusts.

This statement not only maintains the appearance of the Fed’s independence but also suggests that he is a natural fit with Trump’s policy direction. As a long-time ally of Trump, Hassett served as an important economic advisor during his first term as president, and the two have highly consistent economic philosophies. When Hassett says, “If the data shows we can do this,” the key is that his interpretation of “data” may be very different from Bauer’s.

Three reasons why Hassett supports a significant rate cut

Inflation has fallen back into manageable range: US inflation is around 3% year-over-year this year, well below its peak in 2022

The real economy is under pressure: Manufacturing and real estate are facing financing difficulties due to high interest rates, and interest rate cuts can stimulate investment and consumption

Signs of Cooling Job Market: Unemployment rates are rising slowly, and preventive interest rate cuts can avoid the risk of a hard landing for the economy

Hassett has made it clear that a rate cut could exceed the current market expectation of 0.25%, meaning he may support a single cut of 0.5% or even more. This “aggressive rate cut” stance contrasts sharply with Powell’s “gradual adjustment” and is exactly the policy shift Trump wants to see.

Fed Chairmanship Battle: Hassett’s Contenders and Strengths

Trump has said he has narrowed the list of candidates for Fed chairman from 10 to 1 and named Hassett as a “potential Fed chairman” at a White House event. However, Hassett himself said he was not sure Trump had made a final decision. He said: “He makes a decision and then changes his mind.”

Bescent also interviewed several other candidates, including former Federal Reserve Governor Kevin Walsh and current Fed Governor Christopher Waller. Walsh, who served as a Federal Reserve governor during the 2008 financial crisis and has crisis handling experience, is not as closely related to Trump as Hassett. Waller is currently within the Fed and is familiar with institutional operations, but his policy stance is relatively moderate and may not meet Trump’s expectations for aggressive interest rate cuts.

Hassett’s strength lies in its multi-dimensionality. First of all, he is Trump’s long-time ally and economic think tank, and the two are highly aligned on issues such as tax cuts, deregulation and stimulating growth. Secondly, he has an academic background and experience in think tanks, and was a researcher at the American Enterprise Institute, which provides him with professional credibility. Third, he served as the chairman of economic advisers during Trump’s first term, was familiar with the operation of the White House and established a relationship of trust with the president.

Hassett also said that Bescent was also a candidate and “at the forefront”, but Bescent himself has ruled out this option, saying that he prefers his current job as Treasury Secretary. Therefore, Hassett said: “Ultimately, the question of whether I go to the Fed will be a similar decision: Is I more appropriate at the National Economic Council or at the Fed?” This statement suggests that he is seriously considering the position.

Double Stress Test of Market and Politics

If Hassett does take over as chairman of the Federal Reserve and push for a sharp interest rate cut, he will face a double test of the market and politics. The market may welcome the easing of liquidity brought about by interest rate cuts, but it will also question whether the Fed has become a policy tool for the White House. The independence of the Federal Reserve is one of the foundations of trust in the US dollar as the global reserve currency, and if the market believes that monetary policy is politicized, it may trigger the depreciation of the US dollar and capital outflows.

At the political level, Democratic and some Republican lawmakers may criticize Trump for undermining the independence of the Federal Reserve. The FOMC, which sets interest rates, consists of the chairman, six Fed governors, and five of the 12 local Fed bank presidents, and even if Hassett becomes chairman, he will need to persuade other members to support aggressive rate cuts. The cautious attitude shown by Powell during his tenure has considerable support within the FOMC, and Hassett may face internal resistance.