Walsh: Is Trump’s next scapegoat at the Federal Reserve?

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Waller is about to face the long-awaited Federal Reserve Chair confirmation hearing. This moment is fraught with undercurrents: he must show submission to Trump while maintaining the central bank's bottom line amid inflationary pressure—any slip could make him the next scapegoat held accountable by the White House.

The Senate Banking Committee is set to begin Waller’s confirmation hearing this Tuesday. According to descriptions in the Financial Times referencing multiple insiders, the 56-year-old nominee envisions a series of reforms: cutting back on Fed communication frequency and shrinking its $6.7 trillion balance sheet. However, futures markets currently show less than a 50% chance of a single 25-basis-point rate cut this year—far from the "large" and "immediate" cut repeatedly demanded by Trump on his Truth Social platform.

Derek Tang from a monetary policy analysis firm warns, "Waller’s honeymoon may be very short." This points to an awkward situation: if Waller fails to meet Trump’s rate cut demands, he may become, like his predecessor Powell, a target of public attacks by the president—only this time, the "scapegoat" goes from being called "idiot" to being accused of "betrayal."

Meanwhile, the confirmation process itself is full of obstacles: Republican Senator Thom Tillis has threatened to block the nomination from entering a full Senate vote. Current Chair Powell’s term expires May 15, and Trump has warned last week that if Powell does not leave "on time," he will be fired.

The core uncertainty for markets is whether Waller can find a way out between Trump’s political pressure and the Fed’s institutional credibility. Several former Fed officials warn there is historical precedent—1970s Fed Chair Arthur Burns yielded to Nixon’s demand for rate cuts, resulting in years of stagflation and earning the label of "scapegoat."

In other words, regardless of whether Waller chooses compliance or resistance, he risks becoming a scapegoat: compliance repeats Burns’ mistakes and takes the blame for runaway inflation; resistance follows Powell’s path as the next target of Trump’s political wrath.

"The Reformer"—Waller Wants to Shake the Fed’s Foundations

Waller has coveted the Fed Chair role for a long time. Eight years ago, he lost out to Powell; after Trump’s recent election win, he was offered the Treasury Secretary position, but made clear that his ambition was to lead the central bank.

Waller’s policy agenda is notably radical. He is deeply dissatisfied with the Fed’s current communication system, especially detesting the so-called "dot plot"—the quarterly chart showing anonymous rate forecasts from 19 officials. In a speech one year ago, he warned, "once policymakers publish economic projections, they become prisoners of their own words."

In addition to reducing public statements, Waller hopes to lead by example, urging other officials to cut down media appearances. BNY Investments chief economist and former senior Fed official Vincent Reinhart explains: "Waller argues for narrower communication because, as long as actions are consistent, there’s no need to speak constantly. He also believes excessive communication leads to over-commitment and exposes the committee to more political criticism."

On balance sheet issues, Waller aims to shrink the $6.7 trillion sheet swollen by massive bond buying during the financial crisis and Covid pandemic. According to media and insiders, his envisioned shrinkage path is gradual, not seeking a return to pre-2008 levels, and would require extensive pre-research. His main logic: tightening bank system liquidity and financial conditions through shrinkage, creating room to lower short-term rates.

However, former Fed official and Peterson Institute economist Joseph Gagnon points out an inherent contradiction: "He told Trump that balance sheet policy can enable large rate cuts. But I suspect he hasn’t told Trump this might actually result in higher—not lower—mortgage rates." Currently, Chris Waller, one of the Fed’s most respected economists, has clearly rejected the idea of shrinking the balance sheet to pre-crisis levels, calling it "inefficient" and "stupid," as it could cause market turmoil.

Shifting Positions—Can He Be Trusted?

Waller studied under monetarist Milton Friedman at Stanford, and claims to be strongly influenced by him. In 2006, he joined the Fed as its youngest-ever governor and during the financial crisis served as a key link between then Chair Ben Bernanke, Wall Street, and Congress. Mere days before Lehman’s collapse, he warned about inflation pressures, marking him as a hawk on the committee at the time.

Yet during Trump’s presidency, when the president publicly called Powell "idiot" and "moron" to pressure for rate cuts, Waller took a more dovish stance. He referenced a modified argument from former Chair Alan Greenspan, declaring that AI-driven productivity booms would pave the way for significant rate cuts—a view questioned by several FOMC members.

Alan Schwartz, who worked with Waller at Bear Stearns, believes Waller’s decisions will be data-driven, not dictated by the White House: "If facts change, Waller won’t stick to old views. He is highly reputable in financial policy and will strive for the right answer." Guggenheim Partners’ Schwartz adds this means his stance may adjust with changing circumstances.

Former Reserve Bank of India Governor and University of Chicago scholar Raghuram Rajan cautions Waller will take office under "immense political constraints," and that risks in the private credit market may require him to address financial stability alongside monetary policy challenges.

Trump and Wall Street—Both Sides Are Tough

Waller was not Trump’s first choice. According to the Financial Times, Trump long told his inner circle he preferred nominating National Economic Council head Kevin Hassett. But Hassett’s candidacy provoked strong pushback from Wall Street—concerned over his absolute obedience to Trump on tariffs and firing the Bureau of Labor Statistics chief.

The turning point came when Trump ally, D.C. federal prosecutor Jeanine Pirro, launched a criminal investigation against Powell. Powell responded publicly, calling the probe a plot to force the Fed to cut rates, revealing to Wall Street the risks of a "Trump yes-man" as central bank head. JPMorgan CEO Jamie Dimon and other financial heavyweights privately pressured Trump, advocating a different nominee, leading to Waller’s eventual nomination.

Waller does have some Trump circle connections—he is son-in-law to GOP donor and Trump University classmate Ronald Lauder, and acquainted with Treasury Secretary Bessent through Wall Street mogul Stanley Druckenmiller’s family office. Bessent was a key figure in the early nomination interview process.

Senate Confirmation—Blocked First by His Own Party

Waller’s confirmation faces material hurdles. North Carolina Republican Senator Thom Tillis has stated he will block Waller’s nomination from reaching a full Senate vote until the criminal investigation against Powell is withdrawn. This deadlock raises the possibility Powell stays on after his term expires May 15.

Trump warned last Wednesday that if Powell does not leave "on time," he will fire him, showing continued support for Pirro’s investigation. Powell stated he would remain as acting chair until Waller receives majority Senate support.

Without at least 51 of the 53 Republican senators’ support, Waller’s path to becoming Fed Chair could fail. Yet, once the investigation against Powell is settled, political circles and prediction markets generally expect that Senate Republicans will not stop Waller from taking the coveted position.

Some observers even believe the delay in confirmation may not entirely be a negative for Waller. If the courts rule in favor of Cook and Powell in related lawsuits, it could unblock the confirmation process and provide legal protection for Waller against White House pressure. Gagnon bluntly says:

"I believe that whatever Waller told Trump, he doesn’t want to be the next Arthur Burns—the one who yielded to Nixon and triggered years of stagflation. If the Supreme Court protects Lisa Cook’s position, Waller will likely receive the same protection. Then he’ll believe he can do the right thing—and what he thinks is right may well disappoint Trump."

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