Walsh, Trump's next faller at the Fed?

Original by Zhang Yachi

Original source:See you on Wall Street

The Chairman of the Federal Reserve, who had been waiting for a long time, was coming up with Walsh. At this moment, there is an incipient trend: he has to show his submissive attitude to Trump and hold the central bank line under inflationary pressure, and a slight deviation could become the next scapegoat for the White House’s accountability。

The Senate Banking Commission is scheduled to start the confirmation hearing in Walsh this Tuesday. According to the British Financial Times, which cites multiple sources of information, the 56-year-old nominee envisages a series of reforms, ranging from reducing the frequency of the Fed's information communication to reducing the balance sheet size of $6.7 trillion. However, the futures market now shows that less than 50 per cent is likely to achieve a 25 basis point reduction this year – far from the “large” and “immediate” rate reductions that Trump has repeatedly called for on his True Social platform。

The Monetary Policy Analysis Company, Derek Tang, warned that "the honeymoon may be very short for Walsh." This implies an awkward situation: if Walsh doesn't meet Trump's interest rate request, he's likely, like former Powell, to be the target of an open presidential attack. – Only this time, the role of a “sacrifice” has changed from being called a “wit” to being accused of “treachery”。

At the same time, there are obstacles to the confirmation process itself: Republican Senator Tom Tillis threatened to block his nomination to the House, the current president, Powell, will end his term of office on May 15, and Trump warned more last week that Powell would be fired if he failed to leave on time。

For the market, the core uncertainty lies in whether Walsh can find a way out between the political pressure of Trump and the institutional credibility of the Fed. Many former Fed officials warned that there was a precedent in history – in the 1970’s, the Fed’s Chairman, Arthur Burns, bowed to Nixon’s demand for interest rates, which eventually swollen for many years, leaving behind the historical conclusion that the “sacrifice” was a fallback。

In other words, whether Walsh chooses to submit or disobey, he can become a scapegoat: Subordination goes back to Byrnes, taking the fall of inflation out of control, and disobeying Powell, becoming the next target of Trump's political anger。

"Reformer" - Walsh wants to move the Fed's "old."

Walsh has long sought the chairmanship of the Fed. Eight years ago, he lost before Powell, to whom he gave the post of Minister of Finance after his victory, but he made it clear that it was his intention to run the central bank。

The Walsh reform agenda is radical in terms of policy advocacy. He is deeply dissatisfied with the current information communication system of the Fed, particularly the so-called “point-line map”, which is published four times a quarter and provides an anonymous forecast of interest rates for 19 officials. In his speech a year ago, he warned that “when economic forecasts are published by policymakers, they may become prisoners of their own words”。

In addition to reducing public statements, Walsh wishes to lead by example to lead other officials to reduce the frequency of media exposure. The chief economist of BNY Investments, former senior Federal Reserve official Vincent Reinhart, has read: "Wosh's argument for narrow communication is that it is not necessary to speak from time to time as long as the actions are consistent. At the same time, he believes that excessive communication risks over-commitment and makes the Commission more vulnerable to political criticism

On balance sheet issues, Walsh wants to compress this table to $6.7 trillion due to large-scale debt purchases during the financial crisis and the new coronary outbreak. According to sources quoted by the media, the abbreviated path he had envisaged would be gradual, would not seek to return to pre-2008 levels and would require extensive prior research. His core logic was to tighten financial conditions by reducing the liquidity of the banking system and to create space for cutting short-term interest rates。

However, Joseph Gagnon of the Peterson Institute for International Economics, a former Fed official, pointed out the inherent contradiction: “He told Trump that interest rates could be reduced significantly through balanced-table policies. But I guess he didn't tell Trump that this might actually mean higher rather than lower mortgage rates.” Chris Waller, one of the most respected economists in the Federal Reserve Board, has now categorically rejected the idea of reducing the balance sheet to pre-crisis levels, calling it "inefficient" and "soft" because it could trigger market turbulence。

Swinging position, credible

While studying undergraduate studies at Stanford University, Walsh claims to have been deeply affected by the monetism master Milton Friedman. In 2006, he joined the central bank as the youngest governor ever to the Fed, and served as President during the financial crisis, Ben Bernanke, an important link between Wall Street and Congress. A few days before the demise of the Lehman brothers, he had warned about inflationary pressures and was a hawk representative of the Committee at the time。

However, during Trump’s term of office, when the President publicly condemned Powell as a “dumb” and an “dumb” to use pressure to reduce interest rates, Walsh showed a more dove-like attitude. Citing the arguments for improvement from former Chairman Alan Greenspan, he argued that artificially intelligent productivity booms would pave the way for a substantial reduction in interest rates — a view that was questioned by many members of FOMC。

Alan Schwartz, who worked with Walsh in Belsden, argued that Walsh’s decision-making would be based on economic data rather than White House pressure: “If the facts change, Walsh will not follow the rules. He has a reputation in the area of financial policy and will try to find the right answer. In a post entitled "Schwartz of Guggenheim Partners," he adds that this also means that his position may be adjusted as circumstances change。

The former Governor of the Reserve Bank of India, Raghuram Rajan, an academic at the University of Chicago, warned that Walsh would take up his post under “extreme political constraints” and that the potential risks of private credit markets would be additional to the challenges of monetary policy。

Trump and Wall Street: Hard to get on either side

Walsh is not Trump's first choice. According to the British Financial Times, Trump has long indicated to the core that he prefers to nominate Kevin Hassett, Director of the National Economic Commission. However, Hassett's candidacy triggered a strong rebound on Wall Street — deeply concerned about his absolute obedience to Trump on issues such as tariffs and the dismissal of the Director of Labour Statistics。

The turning point in the situation was the criminal investigation of Powell initiated by Franine Pirro, a Trump ally, a federal prosecutor in Washington, D.C. Powell then responded publicly, claiming that the investigation was an attempt to force the Fed to reduce interest rates, and that Wall Street had clearly seen the risk of a "Trump echoer" as central bank president. Financial weights such as Morgan Chase CEO Jamie Damon had privately pressured Trump to choose a different candidate, and Walsh was eventually nominated。

Walsh is not completely unconnected with the Tromp Circle — he is the son-in-law of Ronald Lauder, a Republican gold lord and student at the University of Trump, and at the same time knows the family's office of the finance minister, Stanley Druckenmiller, who is the key person in leading the initial process of the nomination interview。

The Senate confirmed that the Republicans first stopped one of them

Walsh faced substantial obstacles to the confirmation process. Tom Tillis, a Republican senator from North Carolina, has made it clear that Walsh's nomination will be prevented from being voted in the Senate until the criminal investigation against Powell is withdrawn. This impasse raised the possibility that Powell would remain in office beyond his term of office on 15 May。

In response, Trump warned last Wednesday that Powell would be fired if he did not leave on time, while expressing support for Pirro to continue his investigation. For its part, Powell indicated that he would remain in his capacity as interim President until Walsh had obtained majority support in the Senate。

Without the support of at least 51 of the 53 Republican members of the Senate, the path of the Chairman of the Federal Reserve of Walsh would have failed. However, once the fallout from Powell's investigation, the dominant judgement of the political and political forecast market remains that the Republican Senate will not ultimately prevent Walsh from taking up the position he has longed for。

Some observers have even argued that the delay in the confirmation process may not be entirely detrimental to Walsh. If the courts reach a favourable decision in the case of Cook and Powell, not only can the confirmation process be routed, but can also provide institutional asylum for Walsh to resist White House pressure. Gagnon:

"I believe that no matter what Walsh said to Trump, he didn't want to be the next Arthur Burns, the one who bowed to Nixon's will and finally blew up for years. If the Supreme Court had protected Lisa Cook's position, Walsh would probably have enjoyed equal protection. Then he will think that he can do the right thing — and he will probably disappoint Trump.”