Succession: Monetary Policy After Powell
- Ed Sullivan
- Oct 15
- 7 min read
Monetary policy is an important determinant of interest rates, and as a result it acts as a key influence for the construction outlook. High interest rates currently constrain construction activity, particularly in homebuilding. While rate cuts have begun to materialize, they are doing so at a hesitant pace. Given the time lags typically involved between a decision to cut rates and an increase in economic activity, the impact of the rate cut(s) on construction activity during 2025 is expected to be small.
More aggressive interest rate cuts are expected to materialize in 2026 with a new Federal Reserve chairman. Current Chair Jerome Powell’s term will end in May 2026. His term began in 2018 after being appointed to the position by President Trump. Over the past 7 years, his tenure has been praised and criticized. In my view, his approach was pragmatic and data driven. He is not an ideologue or dogmatic person.
While under intense pressure to reduce rates, Powell held firm and based policy decisions on careful, objective, and non-political analyses. He successfully defended the Fed’s credibility. He embraced doing the right thing for the economy - irrespective of politics, is what drove the strongest criticism.
Powell’s replacement as Federal Reserve Chairman will have a huge impact on monetary policy. This, in turn, impacts the level of interest rates, economic and construction activity, the strength of the stock market, and inflation. This article looks at what monetary policy might look like in the wake of Powell’s departure.
Succession
Once selected by President Trump, Powell’s successor will be formally nominated by him and then appear before the Senate Banking, Housing, and Urban Affair Committee. That committee, chaired by Trump advocate Tim Scott (R-SC), will review the nominee and make a recommendation to the full Senate for confirmation . The Senate can approve the recommendation by a simple majority, and Republicans hold a 53-47 majority in the Senate.
Trump’s influence in each phase of the process ensures that he holds the cards. He has stated that presidents should have a say in setting interest rates and has dismissed the threat of inflation posed by tariffs. Furthermore, he has argued that a dramatic reduction in interest rates is warranted now; new that interest rates should be 200 to 300 basis points lower than they are currently; and that his instincts are better than those of Fed officials.
To succeed in this supercharged political environment, Powell’s successor may have to bend the knee and acquiesce to President Trump’s views regardless of his/her training and instincts. At that point, the issue of Federal Reserve autonomy may become a mute issue. Monetary policy could become a tool of short-term political goals, rather than a guardian of long-term stability. This holds the potential that it may be characterized by erratic rate decisions, inflation spikes, and loss of global confidence in U.S. monetary policy.
The new chair will have to tactfully include Trump in the process yet at the same time maintain credibility of the Fed in key global financial arenas. That means the new chair will need to demonstrate the ability to push-back from Trump directives when needed. In short, the new chair will need what Powell has shown repeatedly – a spine. Lacking that principal quality, the next few years are going to be a wild ride.
The Candidates for the Chair
According to insiders, a handful of candidates are on Trump’s short list for the next Fed chairmanship (see below). In my mind, each candidate’s success of being appointed hinges as much on their policy abilities as they do their loyalty and obedience to Trump. They must have credibility in the financial community and be able to tactfully carry out an easier monetary policy agenda even in the face of potentially contradictory data.
In the table below, I have used my judgement as to whether each candidate would cut the Federal Funds rate aggressively even in the context of 3% inflation. Such a possibility raises the risk that monetary policy could become a destabilizing force in the economy. As an interesting side note, the betting website “Predictit” has set odds on the next Fed Chairman. Trump has hinted that he may name his appointee soon.
It’s Not Just the Chairman That Could Change Policy
Most of the media focus is on the person who replaces Powell. While it is a critical role, the Federal Open Market Committee (FOMC) is made up of 12 people including seven Federal Reserve governors, and five regional Federal Reserve presidents. Governors are members of the committee for as long as their term lasts. The regional presidents serve one term on the FOMC and are then rotated out and replaced by regional presidents from other regions. The regional president of the New York district (currently John C. Williams) serves as the vice chair and a permanent member of the FOMC.
This means that not only will the 2026 FOMC welcome a new chairman, but also five new regional presidents. Outgoing 2025 regional presidents were generally data driven and in no hurry to cut rates. Existing regional Fed presidents were supportive of Powell’s policy directives. Adriana Kluger recently resigned and was replaced by Stephen Miran, a Trump advocate. Governor Lisa Cook is expected to remain in place. Finally, it is expected that Powell will resign his governorship once his term as chairman ends. Then, President Trump's appointee is expected to fill this seat on the FOMC.
The incoming committee could suggest significantly easier monetary policy is on its way. While the incoming regional presidents that will serve on the FOMC in 2026 are arguably a bit more hawkish than the current group, they could be led by a chairperson tilted toward Trump recommendations. If aggressive rate reductions are undertaken in the context of persistent inflation, Fed credibility could be threatened.
At issue is whether the incoming group has enough strength to stand up to and overrule the new chair and his/her supporters on the committee. This has rarely occurred. During the late 1970’s through mid-1980s, the committee overruled Chairs Miller and Volker three times. Since then, zero. Nevertheless, the power rests with the committee.
While there are a lot of potential outcomes on how this all plays out, it is likely President Trump will play a key role in monetary policy next year. The full legal independence of the Fed will remain intact, but Trump’s influence could threaten its operational independence. Assuming the next Fed chair is on the Trump team, and the FOMC is more dovish on inflation than the current committee, monetary policy could ease significantly compared to Powell’s Fed.
If the monetary policy does not march to the tune of Trump’s agenda, there will be political consequences. On the other hand, if the new Fed chair does not follow a path that can be reasonably argued as best for the economy, there will be consequences from the financial community and higher long-term rates.
The Setting & Outcome
Monetary policy does not occur in a vacuum. By the time Powell’s successor takes the reigns, the outcome of immigration and tariff policies’ impact on prices will be known. Consumers at the lower end of the income spectrum will likely struggle to make ends meet. The tax benefits of the One Big Beautiful Bill Act will begin to materialize.
At best, inflation will move sideways at an unacceptably high level; the economy will show growth no higher than 2%; and a labor market could show monthly job growth at a meager 50K monthly. At worse, inflation runs significantly higher, economic growth struggles to achieve positive growth, and job losses could accumulate. Stagflation materializes.
It may take time for the differing outcomes to materialize. In any scenario, a more aggressive easing in monetary policy will initially lower short- and medium-term interest rates. Mortgage rates could decline to the low 6% range. Housing, real estate, and capital expenditures are expected to improve. Access to capital will increase. This period could extend through year-end 2026. For planning purposes, the second half of 2026 will likely be characterized by a recovery in interest-sensitive construction sectors such as residential and some areas of non-residential construction.
Given time, however, aggressive monetary policy actions will have significantly different outcomes depending on which set of circumstances it is laid atop. If the easing occurs in the context of already rising inflation, it actually could reignite inflation to even higher levels, prompt the Fed to pivot policy by raising rates, and this could jeopardize growth in 2027. On the other hand, if it occurs in the context of improving inflation, it could stimulate the economy without stirring inflation risks and lead to strong, more sustained growth going forward.
The aggressive easing of monetary policy in the context of:
Stable or slowly improving inflation could be just what the doctor ordered and accelerate the recovery in construction in the second half of 2026 and beyond.
Elevated inflation can prolong and delay a permanent recovery in private construction. If this scenario materializes, it implies a modest construction recovery will materialize in the second half of 2026, followed by a step back in 2027.
Whether aggressive 2026 rate cuts spell economic heaven or hell all hangs on the eventual impact that immigration and tariff policies have on inflation. Thus far, you have to squint to see policy-induced inflation in the current economic data. Maybe this pessimism on the inflation fronts and economic weakening is all wrong. Time and again, during this cycle, the economy has been challenged with adversities and outperformed pessimistic expectations. Its resilience is largely accrued to strength in consumer spending and the job market. This tandem, perhaps reinforced by reduced taxes, could once again be strong enough to maintain growth and at the same time avoid accelerating inflation.
I am certain that more aggressive monetary policy will materialize during the second half of 2026 and that will lead to an initial improvement in private construction. I have my fingers crossed that this all takes place in the context of subdued inflation and that aggressive monetary policy actions will raise near economic growth in 2026 and beyond.
Unfortunately, I am not convinced inflation has been tamed. Tariff inflation may just be delayed in materializing – but not avoided. If this assessment turns out to be correct, and aggressive monetary policy easing occurs, a rough 2027 could materialize.
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