On May 22, former President Trump presided over the swearing-in ceremony for the new Federal Reserve Chair, Walsh, at the White House. Based on his past statements, Walsh's policy stance is considered hawkish, advocating for aggressive balance sheet reduction to combat inflation, with core objectives focused on inflation control and liquidity withdrawal. This has raised investor concerns that Fed policy may tighten under his leadership, for instance, by shrinking the balance sheet to absorb market liquidity, which could adversely affect stock markets. Concurrently, the timing of interest rate cuts may be repeatedly postponed. The ongoing conflict in the Middle East lacks a clear end date, and while Trump has claimed a potential favorable agreement with Iran could be reached, significant uncertainty remains. This has kept international oil prices volatile at elevated levels, contributing to rising global inflation, with U.S. inflation being particularly high. American households have endured high inflation for eight years; continued price increases would significantly pressure Fed policy, potentially leading Walsh to delay rate cuts further or even forego them within the year. During my eighth visit to the U.S. for the Berkshire Hathaway Annual Meeting this May Day and subsequent meetings with Wall Street financial institutions in New York, a common observation was the notably high prices in American supermarkets and restaurants. Controlling inflation is one of the primary challenges Walsh faces upon taking office. Recent U.S. CPI data reaching 3.8%, a multi-year high, is likely to influence his policy decisions. Balance sheet reduction, or quantitative tightening, refers to the Fed selling assets like Treasury bonds to withdraw liquidity from the market, leading to tighter funding conditions. Unlike interest rate hikes, which are a price-based tool, balance sheet reduction is a quantity-based tool. Historically, balance sheet reduction has had negative impacts on stock markets, potentially causing declines, and can also constrain economic fundamentals, though it is beneficial for inflation control. The current balance sheet reduction process may not be overly aggressive, as Trump's appointment of Walsh stemmed from dissatisfaction with former Chair Powell. Trump consistently pressured Powell to accelerate rate cuts, but Powell maintained Fed independence by not cutting. Walsh is likely to consider Trump's stance, particularly the imperative to avoid excessive market disruption, suggesting the balance sheet reduction may proceed gradually. From the split Senate vote to the exceptionally rare presidential attendance at the swearing-in, signals suggest a potential erosion of Fed independence. While Walsh pledged to maintain Fed independence during his oath, influence from Trump may be unavoidable. Trump's assertive style and direct interest in influencing markets make it difficult to avoid his directives to the Fed, a key factor affecting stock markets. This could, to some extent, impact the independence of Fed monetary policy and negatively affect confidence in the U.S. dollar. From a macro perspective, changes at the Fed and Walsh's balance sheet reduction stance could impact emerging markets like China, influencing other central banks' monetary policies towards a tighter rather than more accommodative stance. Regarding capital markets, Walsh's appointment is expected to cause volatility in U.S. stocks, potentially leading to significant adjustments. Current U.S. stock valuations are at historical highs, with a noticeable bubble in AI-related tech stocks. A tightening monetary policy could alter global capital flows, triggering a correction in U.S. tech stocks—a risk that requires vigilance. Stocks are among the assets most sensitive to monetary policy. Additionally, U.S. Treasury yields have risen sharply recently, with the 30-year yield exceeding 5.2%, and may climb further due to balance sheet reduction. This also negatively impacts gold prices; recent spot gold falling below $4,500 per ounce reflects market concerns over monetary tightening under Walsh. This could also impact the global tech bull market, depending on the pace of balance sheet reduction. Historically, Fed policy shifts affect ordinary investors, particularly those with significant exposure to U.S. tech stocks. Adjusting portfolios towards reasonably valued assets with sound fundamentals may be prudent. Predicting when the current AI tech bubble might burst is impossible. At the shareholder meeting, Buffett humorously remarked that the current U.S. stock market resembles a church with a casino inside, where most are drawn to the casino, and such speculative fervor carries bubble-bursting risks. Later, during visits to institutions like Morgan Stanley on Wall Street, executives humorously advised clients to "dance closest to the door." Buffett once likened a bubble to a dance: when the party starts, no one wants to leave early, but the timing of midnight (the end) is uncertain. Dancing near the door is a strategy—staying vigilant to U.S. market changes, especially the Nasdaq index. A sudden sharp drop in the Nasdaq could signal danger. Beyond financial markets, Fed monetary policy transmits to daily life. A tighter policy could constrain the easing scope of the People's Bank of China, impacting consumption, mortgage rates, employment, prices, and domestic demand. For instance, it might suppress consumption growth, prevent further reductions in mortgage rates, and potentially push prices higher, creating ripple effects on employment and domestic demand. The impacts following Walsh's assumption of office warrant close attention.
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