Expectations Rise for Walsh's Succession: Market Concerns Over Fed Independence and Confusion in Rate Cuts and Balance Sheet Reduction

04/28 10:00

On April 28, according to a recent CNBC survey, market divergence regarding Kevin Walsh's future policy direction at the Federal Reserve has significantly intensified following his nomination hearing. The survey, which included 26 economists, strategists, and analysts, revealed that only 50% of respondents believe Walsh can maintain a high level of policy independence, while 46% think his independence is limited or even nonexistent. However, compared to last month, the proportion of those recognizing his independence has increased by 13 percentage points, indicating that the hearing has somewhat alleviated market concerns. In terms of policy expectations, 58% of respondents view Walsh as generally 'dovish,' favoring rate cuts; yet, 65% believe he will adopt a 'hawkish' stance on balance sheet reduction, accelerating the contraction of the Fed's balance sheet. The market is particularly focused on Walsh's previous statements regarding 're-coordinating balance sheet management between the Treasury and the Fed.' Analysts warn that this could undermine the separation of fiscal and monetary policy established in 1951, weakening the long-standing foundation of Fed independence. Regarding the current balance sheet size of approximately $6.7 trillion, 41% of respondents expect that Walsh could reduce the balance sheet by about $800 billion in his first year, while 46% believe it will be difficult to make significant progress in the short term. Additionally, concerning the impact of AI on inflation and productivity, Walsh advocates for proactive policy measures rather than waiting for data confirmation; however, as many as 81% of surveyed experts believe that the Fed should still rely on actual economic data, and the long-term deflationary potential brought by AI is insufficient to justify a rapid shift towards easing policies in the short term.

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