How to understand Walsh's future policy proposals as he is likely to be nominated as the new chairman of the Federal Reserve? From a personal point of view, we should understand Walsh's policy from two relationships: first, naturally, the relationship with Trump. Walsh's wife came to the Estee Lauder family, and his father-in-law had a close relationship with Trump. We can see that many media are adding Walsh's background this year. In fact, after Trump won the second general election at the end of 24, Walsh was a popular candidate for finance minister, and his background had been dug out at that time. Secondly, Druckenmiller is a partner of Quantum Fund Soros, while Bessent was the fund manager of Quantum Fund's London office in the 1990s. After retiring from the Federal Reserve Board of Governors in 2011, Walsh also served as a partner in the Druckenmiller family office (while also working at the Hoover Institution), making Druckenmiller a mentor and benefactor to Bessent and Walsh. On the one hand, the close relationship with Trump should not be ignored, even more important. The relationship with Trump determines whether Walsh can be nominated, but the relationship with Besant and Druckenmiller has a profound impact on Walsh's future policy proposition. 1. What is Walsh's policy proposition? In the previous tweet about the shift in the axis of economic policy power in the United States, it was mentioned that Druckenmiller, Bessent, and Walsh share a common belief in economic policy that the previous approach (fiscal stimulus+ultra loose monetary policy, support for demand, leading to an "asset rich, income poor" economy - soaring stock markets but weak productivity, wage inequality) is outdated. We must end the 15 year Keynesian demand management experiment and shift towards a supply side system, emphasizing productive capital rather than financial engineering. And what Besent is doing now is to provide financial and industrial support, drawing on Hamilton's tradition of relaxing regulations, investment friendly tax rules, targeted tariffs, and bringing back local production and capital expenditure (capex). The government sets rules and the private sector takes the lead. Previously, Walsh and Druckenmiller had collaborated multiple times to write reports and articles discussing these topics Walsh repeatedly uses the term "regime change" to describe the changes needed by the Federal Reserve, which does not simply refer to changing leaders, but rather a fundamental reshaping of the overall policy framework, thinking style, role positioning, and operational mode of the Federal Reserve. He believes that the Federal Reserve has deviated from its core mission (price stability), excessively expanded its role, become involved in fiscal policy, overly rely on quantitative easing (QE) and a large balance sheet, leading to uncontrolled inflation, market distortions, and weakened the independence and credibility of the Federal Reserve. 1) Reducing the balance sheet is just one part of the reform: he advocates for a significant and orderly reduction of the Federal Reserve's current $6 trillion balance sheet (from crisis era "emergency liquidity" to normal), in order to free up resources, reduce bias towards Wall Street, and instead support Main Street (i.e. households and small and medium-sized enterprises). But this is not an isolated measure, but a combination with lower short-term interest rates to achieve 'policy rebalancing'. 2) More extensive institutional changes: He called for abandoning the era of "monetary dominance" (i.e. artificially lowering interest rates and fueling government debt through large-scale QE) and returning to the Federal Reserve's position as a narrow central bank. including: Abandoning the "dogma" of the causes of inflation (such as believing that inflation is solely due to economic overheating or wage increases); Coordinate debt management with the Ministry of Finance to avoid indirect monetization of debt by the Federal Reserve; Reform regulatory and supervisory methods, restore market discipline; The overall 'regime change in the conduct of policy' includes a shift in thinking patterns, decision-making frameworks, and institutional governance. This is also reported by many media outlets, and the core of Walsh's policy of "interest rate cuts+balance sheet reduction" is his tendency to solve problems through institutional reforms. 2. Why did Trump choose Walsh? Today, the market is hedging because of the possible nomination of Walsh, so why does Trump still choose Walsh? Previously on https://(x.com)/qinbufark/status/2000441228270408149? S=20. We have talked about it here: If Hassett takes office: the Federal Reserve may be more inclined to cut interest rates aggressively (but not particularly extreme), and with Trump's economic agenda (such as tariffs+low interest rates), the independence dispute will be greater. If Walsh takes office: policies will be more balanced, rules oriented, with a focus on balance sheet reduction and inflation control, interest rate cuts may be more moderate, more popular on Wall Street, and less independence concerns. Then the selection logic of Trump can be very clear: 1) Of course, Hassett is Trump's first choice, but the choice of Hassett may be strongly opposed by Wall Street. At the same time, the White House also needs Hassett, the chairman of the National Economic Commission, to speak out, especially in the past 26 years; 2) Walsh stands between Trump and Wall Street, relatively neutral, but also advocates interest rate reduction (only slightly moderate), and the interest rate will still go down. At the same time, because of the family background, from the perspective of Trump, there will also be communication with Walsh in the future, which will not be completely out of control. 3) From this point of view, Trump actually agrees with Walsh's policy proposition. Trump's biggest requirement for the Federal Reserve is to cut interest rates (to reduce the debt burden), which is also Walsh's proposition, which may vary in specific extent. In addition, Besant agrees with the reform of the Federal Reserve system he advocates, so does Trump. 3. What exactly does' balance sheet reduction 'mean in Walsh's policy proposal? As mentioned earlier, Walsh's policy proposal is essentially a way to lower interest rates to control debt interest, but it is a hawkish approach towards the balance sheet. In terms of monetary policy of the Federal Reserve, price based tools refer to interest rate adjustments, while quantity based tools refer to balance sheet adjustments. If we look at it this way, on the one hand, Walsh advocates interest rate cuts, and on the other hand, he advocates reducing the balance sheet, which is essentially a quantitative tool adjustment. It looks awkward, but there is a reason for it. If you pay attention, Benson is a critic of the Federal Reserve's massive balance sheet, believing that it has created excessive reserves through QE and distorted market pricing. In 2008, the Federal Reserve shifted from a post crisis "ample reserves regime" - where banks held large amounts of excess reserves and the Fed controlled short-term interest rates through interest payments (IORB) - now appears to be "potentially problematic". The huge reserves (coupled with post crisis regulatory requirements) have resulted in over a quarter of bank assets being allocated to safe assets such as reserves, resulting in a flat interest rate. This has actually reduced the willingness of banks to lend and hindered the growth of the real economy. Can you imagine that over the past decade, the proportion of loans provided by the US banking industry to businesses has decreased from a peak of 50% to the current 20%, leading to the prevalence of private equity lending. The quantitative easing (QE) program previously launched by the Federal Reserve injected a large amount of funds into the financial system through indiscriminate asset purchases, causing banks to have increasingly large reserve requirements and interest rates. On the other hand, it also makes banks increasingly detached from their main business and unwilling to lend, which actually causes greater damage to the real economy. From this perspective, Walsh's advocacy for the Federal Reserve to reduce its balance sheet is essentially to lower the size of bank reserve requirements through institutional reform, giving banks a lot of incentive to lend and leverage funds for real businesses. This was also discussed at the beginning of the year here at https://(x.com)/qinbank/status/2006564661702045802, emphasizing the need to pay attention to the loosening of regulations by the US regulatory authorities on the US banking industry. Financial deregulation, by relaxing regulations, allows banking giants to grow, strengthen, and re lend, allowing the US banking industry to directly participate in economic development again. In fact, to some extent, they are all in the same lineage 4. Is the market overly concerned? The market's concerns are not unreasonable. Although Walsh advocates for interest rate cuts, which can control debt interest rates, the magnitude of interest rate cuts should be smaller than Hassett's. But for balance sheet hawks, it does have an impact on short-term liquidity, and it cannot be said that market concerns are unfounded. However, it should also be noted that Walsh tends to control inflation by reducing the balance sheet (QT), thereby creating space for lowering nominal interest rates. In fact, this is logically self consistent with the Trump government's desire to reduce borrowing costs. He referred to this strategy as' practical monetarism ', advocating that the Federal Reserve and the Treasury must' each perform their own duties': The Federal Reserve is responsible for managing interest rates, while the Treasury Department is responsible for managing the fiscal accounts, The two need to reach some kind of 'new agreement' to solve the problem of high debt interest rates, rather than blurring the boundaries and entangling with each other as in the past. In fact, more attention needs to be paid to the pace of Walsh's policy implementation in the future. If the orderly reduction of pace is not too extreme as he said, the market may gradually adapt to this situation. If its policy proposals can truly be realized, it would be to achieve a healthier and more sustainable economy The best future script is: The interest rate is slowly decreasing, and can be lowered three times or slightly more; By unbinding SLR, the debt repayment yield can be lowered; The Federal Reserve's balance sheet, especially bank reserves, has returned from an excess state, and banks have begun to return to their main business. They truly support the real economy through credit and achieve asset quality growth to drive capital market growth. Of course, we should also be aware that the state of unlimited quantitative easing that everyone expects may be getting farther and farther away. It's actually quite normal. In the anti global era, fiscal policy is increasingly dominant rather than monetary policy. The new economic and monetary policy axis of the United States in the future: Trump provides political support Besent is in charge of financial/industrial leverage Walsh anchors a more market-oriented Federal Reserve Druckenmiller bridges the central bank and the market.