Game of Thrones: Who will sit on the Iron Throne of The Federal Reserve (FED)?

Written by: Oliver, Mars Finance

At the intersection of Constitution Avenue and 20th Street in Washington, D.C., stands the headquarters of the Federal Reserve System – the Eccles Building. It is said that deep within the corridors of this white marble structure, an uneasy ghost still wanders. He is none other than Arthur F. Burns, the former chairman of the Federal Reserve who ultimately yielded under immense pressure from President Richard Nixon and opened the floodgates to the "Great Inflation" of the 1970s.

Half a century later, a similar script seems to be brewing and playing out in a more radical and open manner. This is no longer a secret conversation happening in the Oval Office, but a meticulously planned "shadow war" intended to simultaneously detonate in the court of public opinion and the financial markets. When Donald Trump considers announcing his successor nearly a year before the term of current Chairman Jerome Powell ends, he is calling forth not just a future central bank president, but the ghost of Burns. This signals an ultimate stress test on the independence of the Federal Reserve—the cornerstone of the post-war global financial order—where the gameplay and stakes have far exceeded those of the past.

The Devil's Deal in the Tape

To understand today's game, we must return to the source of history. In 1971, President Nixon's secret recording system captured a chilling conversation between him and then-Federal Reserve Chairman Burns. Facing the upcoming 1972 election, Nixon made no secret of his intentions: "I hope... that before the election, interest rates can come down. We can worry about inflation after the election."

Burns, the economist who initially presented himself with his iconic pipe and resolute image, ultimately could not withstand the sustained pressure from the White House. He yielded. The Federal Reserve's printing press began to accelerate, laying a red carpet of cheap credit for Nixon's re-election campaign. The consequences were catastrophic. This "deal with the devil" is widely regarded as one of the triggers that ignited America’s decade-long "Great Inflation," a nightmare that would only come to an end in the early 1980s at the cost of a painful recession orchestrated by another legendary chairman, Paul Volcker.

The story of Nixon and Burns has become the most classic negative case in textbooks on central bank independence. It reveals a simple yet profound truth: when the reins of monetary policy are seized by short-term political demands, the long-term costs will be borne by the entire country and even the global economy. For forty years after Volcker, the independence of the Federal Reserve has been regarded as a sacred and inviolable consensus, serving as the "anchor" for ensuring the credibility of the dollar and global financial stability.

However, it seems that the lessons of history are being forgotten. What Trump is doing is turning Nixon's whispered conversations in the backroom into a conspiracy announced to the whole world through a loudspeaker.

From "backyard pressure" to "front desk subversion"

Trump's "shadow chairman" strategy, compared to Nixon's methods, has a core distinction in its "openness" and "institutionalization." Nixon's pressure was behind the scenes and personalized; whereas Trump's strategy is open and systematic, attempting to fundamentally change the rules of the game.

The true power of this strategy lies in its "weaponization" of the Federal Reserve's most core weapon—"forward guidance"—turning it against the Federal Reserve itself. Under normal circumstances, the Federal Reserve guides market expectations and reduces uncertainty by clearly communicating its future policy path. However, the existence of the "shadow chair" will create another source of information outside the official channels, an alternative forward guidance filled with political color, coming from the future.

However, this double-edged sword also hangs over the heads of the nominees themselves. As noted by Nick Timiraos, a senior reporter for The Wall Street Journal and known as the "Fed whisperer," the pre-selected "shadow chairman" will immediately fall into an almost intractable political dilemma. If he chooses to publicly criticize the current Federal Reserve policies and aligns with Trump's call for interest rate cuts, he risks being seen by the market and the Senate as a "political flatterer" without independent integrity, which could jeopardize his ultimate confirmation. After all, his appointment requires the support of his future colleagues. Conversely, if he chooses to defend the Fed's cautious stance, emphasizing the importance of data dependence and anti-inflation, he might instantly anger Trump and lose the job even before officially taking office.

This is precisely the most subtle and dangerous aspect of this "shadow battle": it not only tests the current Chairman Powell's composure but also examines the skills of every potential successor in walking the tightrope of loyalty and credibility. As a result, Trump's selection process has become more akin to a high-stakes gamble.

The popular candidates currently emerging represent the two extremes of this dilemma.

The first category is "reputation bet" - Kevin Warsh. As a former Federal Reserve governor and a key aide to Chairman Bernanke during the 2008 financial crisis, Warsh possesses significant credibility capital on Wall Street and in academia. He is viewed as an "insider" with a profound understanding of how the financial system operates. Traditionally, he is a "hawk," critical of inflation and the Federal Reserve's "mission drift." However, paradoxically, his recent remarks seem to indicate a "dovish turn," providing theoretical support for the low-interest-rate path expected by Trump. By choosing Warsh, Trump aims to leverage his market credibility to reassure investors, making the intention to cut rates seem less abrupt. However, the dilemma facing Warsh is also particularly pronounced: the more he publicly criticizes Powell, the more he deviates from his consistent image as an institutionalist, and the more his credibility deteriorates. If he tries to remain neutral, he cannot meet Trump's expectations for his "firepower output." He is like a jewel-encrusted dagger, glamorous and deadly, but may also be too precious to be easily soiled.

The second category is "Loyal Choice" - Kevin Hassett. As the chairman of the White House Council of Economic Advisers during Trump’s first term and the main architect of the 2017 tax cuts, Hassett's loyalty is beyond doubt. He is a staunch supporter of supply-side economics, which aligns closely with Trump's economic philosophy. He even publicly admitted to having regular "lunches" with Powell to convey the White House's views, acting as a direct pressure channel. Choosing Hassett means choosing predictability in policy and reliability in execution. For him, the aforementioned "dilemma" seems less acute, as the market's expectations of his independence are already low. He is likely to not hesitate in choosing to criticize current policies. However, the risk is that a chairman lacking market credibility and widely seen as a purely political appointee will have minimal positive influence on the market, and may instead provoke a more severe negative reaction due to excessive exposure of political interference intentions. He is like a "loyal blade" without unnecessary embellishments, ensuring sharpness and obedience, but may scare the market away due to being too blunt.

Regardless of who is ultimately chosen, the strategic intent is clear: to transform the chairman of the Federal Reserve from an independent economic technocrat into a "cabinet member" who needs to be accountable for the president's political agenda. This fundamentally overturns the paradigm of central bank operations established since the Volcker era.

Twilight of Consensus: When the Cornerstone Begins to Shake

The "shadow battle" is far from an isolated event; it represents a comprehensive challenge to the consensus on central bank independence in the entire "post-Volcker era." The core of this consensus is that, for the long-term stability of the economy, monetary policy decision-making power must be entrusted to an independent institution free from the disturbances of everyday politics. The success of this concept has been an important premise for the global economy to operate during the relatively stable period of the "Great Moderation" over the past thirty years.

However, this consensus is now being eroded from multiple fronts. On one hand, there are attacks from legal and theoretical perspectives. For example, supporters of the Unitary Executive Theory argue that the president, as the sole head of the executive branch, should have the authority to dismiss all officials, including the Chair of the Federal Reserve, without the legal restrictions that require "specific reasons" for removal. On the other hand, the broader Project 2025 proposes more radical reforms, including limiting the Federal Reserve's responsibilities and even exploring the possibility of a return to the gold standard.

In this context, the "shadow chair" strategy resembles a stepping stone, a pressure test against the "high wall" of dismantling the independence of the Federal Reserve. If successful, its chain reaction will be profound. The most immediate danger is that, at a time when the current U.S. government debt has reached a fragile 123% of GDP, it could reignite the flames of inflation. Any premature or politically motivated interest rate cuts could burn the enormous efforts made in the past few years to curb inflation.

A deeper crisis lies in the erosion of the dollar's credibility. The status of the dollar as the world's primary reserve currency is not based on gold or any physical asset, but rather on the absolute trust that global investors have in the stability of the American system and the "risk-free" nature of U.S. Treasury bonds. At the core of this trust is an independent, predictable Federal Reserve that prioritizes maintaining price stability.

political pressure erodes central bank independence

The Final Gaze

History never simply repeats itself, but it always astonishingly rhymes. Today, as we gaze at the 'shadow battle' surrounding the Federal Reserve, what we hear is the echo of history resonating in the halls of the Eccles Building half a century ago.

This time, however, the stage is larger, the stakes are higher, and the weapons are more advanced. It is no longer a power game confined to Washington, but a systemic upheaval broadcast live to the world through modern media and financial tools. Ultimately, what the market will need to price is no longer just inflation and employment data, but how much commitment remains from a country to its most core economic system.

The ghost of Arthur Burns may never have left. He is an eternal warning, reminding people of how fragile the seemingly indestructible foundations of institutions are in the face of the immense temptation of power. When that lighthouse guarding the global financial order begins to sway in the political storm, every person navigating these waters should feel a chill.