NEW YORK (Reuters) -The gulf between where the Federal Reserve projects interest rates will be by the end of 2026 and the more aggressive cutting financial markets expect by then is partly due to the expectation that U.S. central bank chief Jerome Powell will be replaced by somebody more dovish next year, investors said.

They, however, cautioned against assuming that a change of guard at the Fed would necessarily deliver as much policy easing as markets and U.S. President Donald Trump expect.

In new economic projections released last week, Fed policymakers penciled in three quarter-percentage-point cuts by December 2026. That's two cuts short of the roughly 125 basis points of easing that fed funds futures suggest.

The fed funds rate is what banks charge each other for overnight lending, and serves as the Fed's main policy lever. It has stood in the 4.25%-4.50% range since the last easing in December.  

Two of the projected quarter-percentage-point cuts were for 2025, with one more next year. 

While the difference stems from several factors, including expectations for how Trump's tariffs will affect the economy and inflation, hopes for a more accommodative Fed chief are part of the mix, investors said.

"Powell's term is up in May, and he could be replaced by someone super friendly to the administration," Jack Ablin, chief investment officer of Cresset Capital in Chicago.

"I think this is probably a bigger factor than a lot of investors believe," Ablin said.

Trump has not decided on a replacement for Powell and a decision isn't imminent, a person familiar with the White House's deliberations said on Thursday. Chicago Fed President Austan Goolsbee told CNBC any move to name a "shadow" chair would be ineffective.

On Monday, traders in futures tracking the Secured Overnight Financing Rate (SOFR), another key overnight rate, pushed the implied yield of futures contracts maturing in December 2026 65 basis points (bps) below those expiring in December 2025, the most negative that spread has ever been. This development shows that a deeper economic slowdown than expected is also being priced in.

Powell told Congress this week that higher tariffs could boost inflation this summer, and that the U.S. central bank isn't rushing to cut rates. 

Trump, who has repeatedly called for rate cuts, said on Tuesday that U.S. rates should be lowered by at least two to three percentage points. On Wednesday, he called Powell "terrible" in his latest attack on the central bank chief and said he has three or four people in mind as contenders for the top Fed job.

"The administration is now laying the groundwork - including with the 'One, Big, Beautiful Bill' - to turbocharge economic, job, and investment growth, and it's high time for monetary policy to complement this agenda and support America's economic resurgence," White House spokesperson Kush Desai said.

Trump has toyed with the idea of selecting and announcing Powell's replacement by September or October, the Wall Street Journal reported on Wednesday, citing people familiar with the matter. Such a move would mean Powell would have a "shadow" for possibly the last six meetings of his tenure.

A battered dollar took another beating on Thursday as investors fretted over fresh signs of an erosion in U.S. central bank independence.

Still, such a move would back the market's more dovish view on future rate cuts.

"It's a reasonable thesis that Trump will put up a person that will be more amenable to lower rates," said Mark Malek, chief investment officer of Siebert Financial.

FED INDEPENDENCE

According to online prediction market Polymarket, the top candidates to replace Powell are Fed Governor Christopher Waller, former Fed Governor Kevin Warsh, White House economic adviser Kevin Hassett, Treasury Secretary Scott Bessent and Judy Shelton, a former Trump pick for the Fed's Board of Governors whose nomination was withdrawn during the Biden administration.

Another prediction site, Kalshi, lists Waller as having the best chance to be nominated, closely followed by Warsh.

Waller recently said he felt the inflation risk from tariffs was small and that the Fed should cut rates as soon as its next meeting in July. 

Meanwhile, Warsh suggested last month a possible pathway to lower policy rates and criticized the Fed's conduct of monetary policy.

Still, investors warned that the head of the Fed is only one of 12 voting members at the central bank's monetary policy meetings. Part of the role is to build consensus with a large group of policymakers, making excessive reliance on that person's ability to deliver lower rates risky.

"Obviously the chair has a very big influence on what the committee does, but the chair is not the committee," Siebert Financial's Malek said.

"The chair will always try to seek a consensus," he said.

Nor is it a given that the next Fed chief would risk the central bank's independence.

"The most important part about the Fed is its neutrality," said Jay Woods, chief global strategist at Freedom Capital Markets.

"For the next Fed chair to get appointed, yes, you want to appease the president to get that nomination. But you still have to get everyone in that room to be behind a common narrative," Woods said.

A rate-cutting trajectory not backed by data would hurt the next Fed chief's image, analysts said.

"Whoever is appointed may have a cloud cast over his or her term that President Trump is pulling the strings," said Brian Jacobsen, chief economist at Annex Wealth Management.

"I'm not too worried that we're going back to a period where the chair is in the pocket of the president, like under (President Richard) Nixon."