Summary of Six Major Challenges Faced by the Federal Reserve This Year: From Interest Rate Path to Policy Framework Maintain independence: Market concerns are not unreasonable. If Trump successfully shakes the confidence of the outside world in the Fed's commitment to curbing inflation, the consequences could be catastrophic. Nevertheless, even if the next Federal Reserve chairman wants to further cut interest rates according to Trump's preferences, the outcome is not a foregone conclusion. The chairman must also persuade the Federal Open Market Committee responsible for policy-making, otherwise there is a risk of losing credibility if it fails. Maintaining the trust of the FOMC, Federal Reserve staff, investors, and the president simultaneously will be a challenging task. 2. Interest rate path: Setting aside political factors, the Federal Reserve has ample reasons to maintain the status quo. After cutting interest rates by 25 basis points three times last year, Powell believes that the current monetary policy is within a reasonable range of neutral interest rates. The contradiction between maintaining labor market stability and achieving the 2% inflation target should be reduced. It will take a considerable amount of time to accumulate sufficient evidence to prove the rationality of further adjusting interest rates. 3. Assets and liabilities: It is expected that the Federal Reserve will continue to purchase treasury bond and maintain a large enough investment portfolio to ensure that banks have sufficient cash reserves and ensure the smooth operation of the short-term lending market. However, some candidates for the position of Federal Reserve chairman advocate for a significant reduction in the balance sheet. If implemented, this will make the execution of monetary policy more complex, not only increasing the volatility of interest rates, but also increasing the risk contagion within the banking system. 4. Banking regulation: The regional banking crisis in 2023 exposed serious deficiencies in regulatory processes and culture. Federal Reserve Governor Bauman advocates focusing on substantive issues related to bank safety and stability, and streamlining overly complex and repetitive regulatory provisions. These goals are reasonable, but how to translate them into practice remains to be observed. Simply relaxing regulation may expose taxpayers and the overall economy to undue risks. 5. Stablecoins: Federal Reserve Governor Waller suggested that the Federal Reserve provide "simplified accounts" to fintech companies with limited banking licenses, such as allowing stablecoin issuers to deposit reserves with the Federal Reserve. But unlike traditional Federal Reserve accounts, these accounts do not charge interest, do not provide daytime overdrafts, and cannot obtain loans from the Fed's discount window, which limits their utility, especially in situations of pressure. The solution to this problem will help determine the future of the US payment system. 6. Policy framework: The communication mechanism of the Federal Reserve needs to be reformed. For example, its quarterly economic forecast summaries overly emphasize modal forecasts, but conceal the underlying reasons for differences in the appropriate interest rate path, namely differences in views on the economic outlook or how monetary policy should respond. A better approach is to follow the example of the European Central Bank and release a staff forecast with alternative plans attached. This will help market participants understand how the Federal Reserve will respond if the economy deviates from benchmark forecasts, thereby improving the effectiveness of monetary policy. Although Chairman Powell hinted at possible changes in May last year, there has been no progress so far.