Trump's "perfect criteria" for the next Federal Reserve Chair are facing a harsh reality check. He desires a candidate who is both loyal to the White House and commands market trust, all while driving down long-term borrowing costs, but such a "unicorn" may not exist. As the two front-runners, Kevin Hassett and Kevin Warsh, reveal significant shortcomings, BlackRock executive Rick Rieder and Fed Governor Christopher Waller are emerging as more viable alternatives.

Speaking at the World Economic Forum in Davos this Wednesday, Trump indicated that the field of candidates had narrowed to "probably one," though he declined to name the individual. The President expressed his hope that the chosen Chair would emulate former Chairman Alan Greenspan, naming BlackRock's Rick Rieder and former Fed Governor Warsh as strong contenders.

A report suggests Trump appears to be searching for an "elusive unicorn": a loyalist who can appeal to his political base, survive the Senate confirmation process, and possess the market credibility to lower long-term borrowing costs. However, such a candidate might be impossible to find, at least not among the two "Kevins" who have long led in betting markets.

Through a process of elimination, only two feasible candidates remain: Rick Rieder, viewed as a bond market "globalist," and Christopher Waller, a "Fed establishment" insider.

The two "Kevins" each possess critical flaws. National Economic Council Director Kevin Hassett, long considered a top contender and seen as a staunch Trump loyalist, faces investor skepticism over whether he has the backbone to uphold the Fed's tradition of independence and tackle the difficult task of taming inflation.

Market doubts about Hassett seem to have deepened this month after the administration used the Justice Department to threaten incumbent Chair Powell. Trump himself appeared to diminish Hassett's chances last week at a White House event, telling him, "To be honest, I'd kind of like to keep you where you are."

Meanwhile, Kevin Warsh, currently the leader in betting markets, is far from Trump's "perfect fit." Despite recent media appearances aimed at currying favor with the Trump White House, Warsh is fundamentally a lifelong hawk and a staunch critic of quantitative easing, making him unlikely to fulfill Trump's desire for significantly lower policy rates. His free-market conservatism, shaped at the Hoover Institution, aligns more with an earlier era of the Republican Party than with the MAGA populism Trump represents.

Rick Rieder, BlackRock's Chief Investment Officer of Global Fixed Income, has seen his odds surge recently as a dark horse candidate. Reportedly, Rieder's interview with Trump last Thursday went well, and betting markets now place him second only to Warsh. He is viewed as a respected market insider who understands its mechanics and could likely secure Senate support.

In his BlackRock commentaries, Rieder has argued for looser monetary policy in recent months, though his rationale is more economically sound than the arguments often made by the President's team. He sees greater risks in the labor market than from inflation and has stated that tight policy can have unintended distributional effects, such as stimulating spending by wealthy asset owners while harming small businesses and younger workers. "This places Fed policymakers in a challenging position," he wrote in a December 10 report, "and we have long argued that the policy rate tool is too blunt to address issues better solved through fiscal channels."

However, Rieder would be an unconventional choice. He is the only candidate without prior Fed experience and one of two without a Ph.D. in economics. His closest brush with monetary policy-making was serving on the New York Fed's Investor Advisory Committee on Financial Markets. Politically, Trump's MAGA allies might object to his ties to the world's largest asset manager, a firm they label a "globalist" financial institution accused of promoting the spread of ESG investing.

If Trump's disappointment with the two Kevins leads him to default to current Fed Governor Christopher Waller, it could be one of the administration's most fortunate developments. A Fed Board member since 2020, Waller holds a deep respect for the institution and has demonstrated exceptional policy intuition since inflation became a primary concern in 2021. In 2022, he correctly argued how the Fed could fight inflation with high rates without triggering a recession. More recently, his intellectual leadership has helped prepare the committee for a series of risk-management rate cuts this year, which he supports to protect the labor market.

Waller aligns with the President on the direction of rates, but for the right reasons, and he has earned the credibility to help finish the inflation fight and lower long-term borrowing costs. He is the candidate Trump doesn't know he wants. But he is also a firm believer in the existing system, which could anger a President determined to shake up the world's most important central bank. If he doesn't get the job, it will likely be because Waller is clearly unwilling to lead the independent Fed as Trump's lackey.

The White House's rush to make this critical decision is regrettable, especially with Powell's term not ending for another four months. Yet, both Waller and Rieder are strong choices, far superior to the other candidates. If the administration, through its own chaotic and hasty process, stumbles into selecting one of them, it would be a fortunate outcome for markets and the American people.

As investors await Trump's nomination for the next Fed Chair, a key question is emerging: how will the candidate manage the Fed's $6.6 trillion balance sheet? Kevin Warsh has been critical of the Fed's current strategy and is a strong advocate for shrinking the balance sheet size. In contrast, BlackRock's Rick Rieder has argued the Fed should halt the reduction of its holdings to avoid turmoil in funding markets.

Warsh's criticism of the Fed's more aggressive use of its balance sheet spans over 15 years. A key differentiating feature for Warsh is his strong support for shrinking the Fed's balance sheet. In speeches over the past year, Warsh has argued that years of aggressive bond buying went too far, risking dragging the Fed into the "messy political business of fiscal policy." He supported the initial bond-buying programs after the 2008 global financial crisis but later warned that restarting purchases could fuel inflation and distort market signals.

More broadly, Warsh believes that by keeping rates artificially low for extended periods, the Fed has facilitated the accumulation of U.S. government debt and encouraged what he terms a form of "fiscal dominance," where financial markets become overly reliant on central bank support.