To get everyone to applaud, Mr. Walsh needs to deliver the performance of a lifetime.

Source: Jinshi Data

Few people believe that the Federal Reserve is an all-powerful institution. However, when Kevin Walsh first attended a Federal Reserve meeting in 2006, he successfully persuaded a colleague to sing at the meeting. In the years that followed, Walsh mostly emphasized a consistent theme: inflation is dangerous, monetary policy often over-stimulates, and the Fed's bond-buying program is the root of many economic troubles in the U.S.

Recently, Walsh's rhetoric has changed. The former inflation hawk seems to have donned new feathers. This shift has helped him gain favor with Trump, who is eager to lower interest rates. After being a dissenter for many years, Walsh is about to take the helm of the world's most important central bank. What he is calling for is not just "institutional reform." What this actually means remains somewhat vague, but Walsh's two-decade record of criticizing the Fed provides clues about what the U.S. and the world should expect from "Walsh Economics."

Starting with the core work of any central bank president: guiding interest rates. By law, the Fed follows a "dual mandate": balancing low inflation with a healthy job market. For most of Walsh's career, he has firmly believed that inflation comes first. "If price stability is squandered, financial stability will be at risk. If financial stability is lost, the economy will be threatened, and the social contract will be challenged," he wrote in 2021.

Thus, Walsh typically stands with the hawks advocating for strong measures to suppress inflation. The Economist used an AI model to position nearly 200 of his speeches, television appearances, and research papers on a "hawkish - dovish" spectrum. Before this year, the only times he shifted to a dovish stance were during severe crises: the global financial crisis of 2007-09, the COVID-19 pandemic, and the collapse of Silicon Valley Bank in 2023. This situation persisted until Trump won a second term. Since then, he has repeatedly and firmly called for interest rate cuts, which is a stark contrast to his earlier position.

What has changed? The imminent productivity boom brought about by artificial intelligence and Trump's enthusiasm for deregulation. Walsh believes these factors will suppress inflation. He worries that high interest rates could stifle the growth that comes with it. However, even if productivity surges as he predicts (which is uncertain), this argument is flawed. While higher productivity can allow the economy to grow faster without pushing up prices, once inflation does rise—currently still above the Fed's 2% target—interest rates will need to be increased to curb demand. Furthermore, productivity improvements typically lead to higher investment, which raises the "neutral interest rate"—the level at which Fed policy is neither accommodative nor restrictive. Cutting rates when this benchmark rate rises could overly stimulate the economy and fuel inflation.

If Walsh is wavering on interest rates, he has remained steadfast on the main issue of U.S. monetary policy—the Fed's bloated balance sheet of trillions of dollars. The traditional debate about quantitative easing (the financial term for buying bonds with newly printed money) often centers on whether its impact is minimal or nonexistent. Walsh has notably attributed the following "crimes" to quantitative easing: government profligacy, capital misallocation, increased inequality, diminished Fed independence, a more fragile banking system, and declining productivity. Some of these accusations are credible, while others are less so. But all of them seem exaggerated.

To reduce what he believes is the economic imprint left by quantitative easing, Walsh hopes to shrink the Fed's balance sheet. This is in stark contrast to the Fed's recent decision to end quantitative tightening (by allowing bonds to mature to reduce the balance sheet). If Walsh begins to sell bonds, the direct effect would be to lower bond prices and raise yields. These yields determine key interest rates in the economy, including mortgage rates. Walsh's plan is to offset these increases by lowering short-term rates. The result would be a steeper yield curve, as the spread between long-term and short-term borrowing costs would widen. Finding the right balance will be a delicate dance, especially since the impact of Fed bond purchases on bond yields is uncertain.

Even if he succeeds, another problem will arise. The bonds held by the Fed correspond to bank reserves, which are precisely what the Fed issued to purchase those bonds. Since the financial crisis, these reserves have become the primary tool for setting interest rates. If the retained reserves are too low, the interbank overnight lending market could become chaotic, potentially leading to a larger-scale version of the "repo" liquidity crisis of 2019.

Now, let's look at the most direct dimension of Walsh's proposed "institutional reform": reshaping the Fed itself. The Fed has made mistakes in recent years—it was caught off guard by the surge in post-pandemic inflation. Some of Walsh's criticisms are valid, such as the view that central banks should steer clear of politicized areas like climate change and racial justice.

However, some others are debatable. Walsh accuses the Fed of being overly reliant on data, particularly outdated government statistics. But without credible data to track the economy, what remains is only unfalsifiable speculation about future productivity booms. The private data providers he champions have a long way to go to replace official data. Just look at the stock market; it still reacts dramatically to the release of employment or inflation data.

As Fed Chair, Walsh needs to please three parties: Trump, the financial markets, and his colleagues in the Fed's rate-setting committee—a group of technocrats whose votes he needs to accomplish anything. Trump is extremely eager for lower interest rates; the market's concerns about U.S. assets are growing; and his colleagues at the Fed will obstruct his tenure if they perceive him as too politicized.

To get everyone to applaud, Mr. Walsh needs to deliver the performance of a lifetime.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。