Kevin Walsh is set to be sworn in as the 11th Chair of the Federal Reserve in modern history on Friday, with President Trump presiding over the ceremony. The 56-year-old will succeed Jerome Powell, who led the Fed for eight years. Notably, Powell will remain as a Fed Governor after stepping down as Chair, marking the first time in nearly 80 years that a former Chair has stayed on in a governor role. Market observers note that Walsh assumes leadership as the Fed navigates one of its most complex policy environments in recent years: escalating Middle East conflicts are driving up oil prices and rekindling inflation pressures, while U.S. economic growth is slowing, and President Trump continues to urge the Fed to cut rates swiftly.
However, recent remarks from Fed officials and market pricing indicate a clear shift towards a more hawkish overall stance within the central bank. Walsh previously served as a Fed Governor and was involved in the joint Fed-Treasury market rescue efforts during the 2008 global financial crisis. After leaving the Fed, he gradually became a critic of its prolonged crisis-era accommodative policies and has argued that the Fed has "overextended its mandate" in recent years by engaging on issues like climate change and social equity. Walsh has expressed a desire to reduce the Fed's influence over markets.
Despite President Trump's long-standing public criticism that Powell was not aggressive enough in cutting rates, markets are increasingly leaning toward the view that the Fed may not only refrain from cutting rates in the near term but could potentially resume raising them. Interest rate futures show investors are now beginning to price in the possibility of a 25-basis-point Fed rate hike this year.
Concurrently, hawkish voices within the Fed are growing louder. Governor Christopher Waller stated explicitly on Thursday that the Fed needs to send a clear signal to the market: the probabilities of a future rate "hike" and a "cut" in the path ahead are currently perfectly balanced. Waller warned that if inflation does not resume its downward trajectory soon, he would not rule out the possibility of further rate increases. He also expressed support for removing language from future policy statements that currently hints at an "easing bias." Waller emphasized that the inflation outlook remains the most critical factor determining monetary policy direction. He noted that if long-term inflation expectations show signs of becoming "unanchored," he would not hesitate to support raising the target range for the federal funds rate.
Following Waller's comments, U.S. Treasury yields underwent a sharp V-shaped reversal. The yield on the 10-year U.S. Treasury note climbed back above 4.57%, having earlier fallen to an intraday low of 4.5241%. The 2-year Treasury yield rose to 4.1231%, extending its intraday gain to approximately 3.7 basis points. Meanwhile, precious metals markets came under significant pressure. Spot gold fell below $4,500 per ounce, while spot silver dropped to around $75 per ounce.
Analysts point out that Walsh's imminent inauguration, the expanding hawkish faction within the Fed, and inflation pressures stemming from Middle East conflicts are reshaping market expectations for U.S. monetary policy. Although Walsh himself has stated a desire to achieve rate cuts while controlling inflation, the current internal Fed atmosphere has clearly shifted from "when to cut rates" to "whether a rate hike is needed again."
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