In the Market: Wall Street's banking on next Fed chair to stand up to Trump

• Banking executives believe a Trump-appointed Fed chair will be predisposed to cutting rates but hope they will act independently when facing hard economic data, with one executive interpreting Trump's comments as 'permission to be independent'
• Major bank CEOs including JPMorgan's Jamie Dimon and Bank of America's Brian Moynihan have publicly called for Fed independence amid administration actions seen as undermining it, including recent threats against Powell
• Some banks are stress testing balance sheets for scenarios ranging from stagflation to high-growth high-inflation environments, with at least one bank testing for interest rate swings of 100 basis points to manage tail risks

Summary: Wall Street Banks Stress Test for Potential Fed Independence Erosion

Global banking executives at the World Economic Forum in Davos expressed cautious optimism that the next Federal Reserve chair will prioritize economic data over political pressure, despite ongoing concerns about the Trump administration's challenges to Fed independence.

Key Developments

President Trump is expected to soon announce his nominee to replace Fed Chair Jerome Powell, whose term ends in May. The administration has taken steps viewed as undermining Fed autonomy, including threats of criminal indictment against Powell over Congressional testimony regarding a Fed building project.

Market Implications

Wall Street executives interviewed believe a new chair may initially be predisposed to lowering rates, potentially increasing inflation and longer-term rates. However, they anticipate the appointee will ultimately follow economic data once in office. Macquarie Group's David Doyle noted "potential for an incoming Fed Chair to sway the committee in a more dovish direction" but believes this risk is mitigated by changing incentives once the role is assumed.

Commerce Secretary Howard Lutnick criticized traditional monetary policy approaches, questioning why the U.S. pays higher rates than other credits despite being "the best credit in the world."

Risk Management Response

Major banks are conducting extensive stress tests on their balance sheets, examining scenarios ranging from stagflation and recession to high-growth/high-inflation environments. One bank disclosed it stress tests for interest rate swings of 100 basis points beyond market pricing to account for tail risks.

JPMorgan's Jamie Dimon and Bank of America's Brian Moynihan have publicly advocated for Fed independence. Concerns about eroding independence are already reflected in market pricing, according to analysts.