<div id="readability-page-1"><div><div><p>Tao Zhu, Jinse Finance</p><p><strong>Summary:</strong> Federal Reserve Chairman Jerome Powell is about to step down, and he will be succeeded by Walsh. This personnel change is seen by the outside world as the US monetary policy system entering a &#34;repricing phase,&#34; and the capital market is generally paying attention to the policy changes that Walsh may bring. The expectation of a Fed rate cut may be changed to an expectation of a rate hike.</p><h2>I. Walsh's Policy Propositions</h2><h3><span>1. Inflation and Interest Rate Policy</span><br/></h3><p>On May 18, the yield on the 30-year US Treasury note rose to 5.159%, the highest level since May 2025. The yield on the 10-year US Treasury note rose to 4.631%, a new high since January 2025. The yield on the 2-year US Treasury note rose to 4.103%, a new high since February 2025.</p><p> The movement of US Treasury yields is closely linked to the pace of the Federal Reserve's interest rate hikes and cuts. Short-term Treasury yields fluctuate in line with policy rate expectations, while medium- and long-term yields adjust in tandem with monetary policy direction. This recent collective rise in US Treasury yields indicates a significant cooling of market expectations for Fed rate cuts. Investors generally believe that the Fed is unlikely to begin a rate-cutting cycle in the short term, and that high interest rates will persist for a longer period, even leading to a reassessment of the possibility of restarting rate hikes. The synchronized rise in market interest rates fully reflects the consistent expectation of a tightening stance from the Fed, and also indicates that the window for rate cuts is being extended, with overall market interest rates trending towards a tightening direction. Warsh has repeatedly stated in past speeches that he favors a data-driven interest rate policy. Given the current US economic data, Warsh is expected to support maintaining high interest rates until inflation declines significantly. 2. Quantitative Tightening and Balance Sheet Management Regarding balance sheet management, Warsh supports a gradual reduction of the Federal Reserve's balance sheet to reduce market liquidity pressures on inflation, but emphasizes the need to maintain financial market stability. Warsh believes that the key to reducing inflation lies in controlling the money supply rather than raising interest rates. He argues that the Fed's purchase of Treasury bonds leads to excessive fiscal expansion, resulting in soaring debt and inflation. Therefore, he advocates that the Fed should continue to shrink its balance sheet and simultaneously implement interest rate cuts. This suggests that quantitative tightening policies may continue in the future, but at a more cautious pace to avoid excessive shocks to the bond market and financial system. 3. Views on the Independence of the Federal Reserve Warsh believes that interest rate decisions and monetary policy operations must be based entirely on economic data and long-term goals, and not on political cycles. He emphasizes that the Fed's independence as a central bank is a prerequisite for achieving stable growth and low inflation. Warsh has vowed to maintain the Fed's independence and stated that he &#34;absolutely will not&#34; become a puppet of the president. II. What Impact Will Warsh Have on the Federal Reserve? Before taking office, Warsh proposed structural reforms to the Federal Reserve, including reassessing inflation models, reducing the size of the balance sheet, decreasing the frequency of forward guidance, and strengthening coordination with the Treasury on Treasury asset allocation. He also criticized the Fed for &#34;functional expansion&#34; and excessive market intervention in recent years. In his April testimony before the Senate Banking Committee, Warsh expressed his vision that the Fed might take less action and be more willing to influence markets unexpectedly. Based on Warsh's recent confirmation hearing, he is positioning himself as an architect of &#34;institutional change,&#34; marking a break from the era of Ben Bernanke, Janet Yellen, and Powell. Warsh has sharply criticized the Fed's inflation response during the pandemic, indicating his desire to re-examine how policymakers model price pressures, relying more on supply-side analysis, and potentially shifting towards alternative inflation indicators that downplay tariff-driven inflation spikes. Warsh will influence the way the Federal Reserve interacts with the market in the following ways:</p><p><strong>1. **Reduce Market Participation** From 2020 to 2022, the Federal Reserve purchased more than $4 trillion in Treasury bonds and mortgage-backed securities to support markets and the economy.</strong></p><p>Warsh criticized the Fed for normalizing tools originally intended only for emergencies. Warsh also criticized that purchasing Treasury bonds creates the illusion that the Fed is trying to help the federal government finance its debt. He believes the Fed should reduce its use of these emergency tools and rely more on interest rate adjustments.</p><p><strong>2. **Reduce the Fed's Views from the Market** The Fed sends clearer signals to investors regarding its potential policy actions. The Fed increasingly views &#34;forward guidance&#34; as a policy tool—for example, informing the market that the Fed will not raise the benchmark interest rate next year helps keep other interest rates low. This allows the market to prepare and anticipate policy adjustments before they are officially announced. Warsh believes the market is overly reliant on the Fed's rhetoric. 3. More ad-hoc decisions and more chaotic internal debates. Many of the Fed's decisions are actually made before officials even enter the meeting room. Warsh has stated that he prefers the Fed to make decisions on the same day they are made, believing this helps the Fed better respond to the latest economic developments. 4. Reduce reliance on overall inflation data. Finally, Warsh criticizes the data the Fed relies on and how the central bank uses that data. He has expressed doubt that mainstream indicators like the Consumer Price Index (CPI) and the Personal Consumption Expenditures Index (PCE) truly reflect &#34;underlying&#34; inflation. He also believes the Fed places too much emphasis on these key indices, effectively allowing retrospective data to dictate policy. In his view, because the CPI and PCE reflect what has already happened, and the Fed's policies themselves have a long lag, the Fed is always slow to react. Warsh suggested that the Federal Reserve should place greater emphasis on judgment and forward-looking economic analysis—assessing where long-term forces such as productivity gains and technological changes might lead the economy—rather than retrospectively using data to confirm past economic trends. III. What Will Happen to the Market After Warsh Takes Office? Morgan Stanley predicts that Warsh will implement policies such as reducing the balance sheet and weakening forward guidance after taking office. Morgan Stanley analysts stated that Warsh's appointment as Federal Reserve Chairman will bring long-term institutional change risks and may exacerbate volatility in the US Treasury market. A team led by Matthew Hornbach pointed out that under Warsh's leadership, the Federal Reserve may adopt new inflation indicators, reduce forward guidance, and promote a reduction in the size of the balance sheet; these changes &#34;may increase volatility between each interest rate meeting.&#34; AMP Chief Economist Shane Oliver stated that Warsh is committed to maintaining the Fed's independence, and he may prioritize AI transformation over employment. Warsh may also prioritize cut-off mean inflation over core PCE, though this could be seen as selective. Warsh's stance may be slightly more dovish than Powell's, but there won't be any fundamental difference. JPMorgan strategists pointed out that Warsh favors gradual rate hikes and cautious balance sheet reduction, which could provide mild support for the stock market and the dollar, but tech stocks may face pressure. IV. The Fed May Maintain High Interest Rates On May 18th, CME's &#34;FedWatch&#34; showed a 99.2% probability that the Fed would maintain interest rates unchanged by June, and a 0.8% probability of a cumulative rate cut of 25 basis points. By July, the probability of maintaining the current interest rate is 95%, the probability of a cumulative 25 basis point rate cut is 0.7%, and the probability of a cumulative 25 basis point rate hike is 4.2%. Goldman Sachs stated that due to stronger-than-expected inflation resilience, the bank has postponed its expectations for the Fed's next two rate cuts by one quarter, to December 2026 and March 2027, respectively.  Goldman Sachs' US economists believe that the transmission effect of energy costs may cause core personal consumption expenditures (PCE) inflation to remain around 3% this year, rather than the Fed's 2% target, thus delaying the conditions needed for policy easing. Bridgewater Associates founder Ray Dalio stated that with persistent inflationary pressures coupled with slowing economic growth, policymakers must remain cautious. &#34;We are undoubtedly in a period of stagflation,&#34; he said, adding that the US economy is already in a stagflationary environment, and if Warsh chooses to cut rates, it will be a policy mistake. Jeffrey Gundlach, CEO of DoubleLine Capital LP, stated that investors will not see an interest rate cut at the next Federal Reserve policy meeting.  “People were expecting two rate cuts this year, but the inflation market simply isn’t cooperating.”</strong></p><h2>V. The Impact of Warsh’s Appointment on the Crypto Market</h2><p>Wash himself supports crypto assets and has invested in prominent projects such as Polymarket, Solana, Optimism, dYdX, and Compound.</p><p>For details, please see “Wash’s Investment Empire”</p><p>He stated at a Senate hearing that digital assets “have become part of the U.S. financial system” and supported their inclusion in the financial system to provide investors with more opportunities and protection.  This statement is seen as a policy signal from Warsh that he is more open to the crypto industry as a whole.</p><p>Warsh has previously called Bitcoin &#34;an important asset that helps policymakers.&#34; However, in an overall economic environment where the Federal Reserve will maintain high interest rates, Warsh's appointment will not be entirely beneficial to the crypto market. Zach Pandl, head of research at Grayscale, wrote that with accelerating inflation and significant increases in energy prices in the US, the new Fed chairman Warsh is expected to have to maintain high interest rates. The market generally expects the Fed not to cut rates before September 2027. This &#34;long-term high-interest-rate&#34; policy will have three major impacts on crypto assets: 1. Pressure on &#34;currency devaluation trades&#34;: The cost of holding non-interest-bearing assets such as Bitcoin is rising, and high real interest rates increase the opportunity cost of holding zero-yield alternatives, putting short-term pressure on assets like Bitcoin. However, Pandl remains optimistic about Bitcoin's prospects, expecting positive regulatory developments, including the CLARITY Act, to offset some of the negative impacts. 2. Accelerated On-Chain Deployment of Fixed-Income Assets: USD-denominated fixed-income products generally offer higher yields than their DeFi counterparts. If crypto investors obtain higher returns on tokenized bonds, issuers may push for more assets to be on-chain, promoting the digitization of fixed income. 3. Increased Revenue for Stablecoin Issuers: Stablecoin issuers like Circle hold interest-bearing assets but cannot pay interest to their tokens. Rising interest rates directly increase their revenue. Pandl estimates that for every 25 basis point increase in short-term interest rates, Circle's revenue could increase by approximately $190 million. Zach Pandl concludes that the prolonged period of high interest rates will create resistance to &#34;currency devaluation trades,&#34; while simultaneously driving the tokenization of fixed-income assets and increasing the revenue of stablecoin issuers.</p></div></div></div>

The eight-year Powell era at the Federal Reserve is drawing to a close, with incoming Chair Walsh set to take the helm this week. A proponent of "accelerating balance sheet reduction to create room for rate cuts," Walsh faces a formidable challenge right from the start: a CPI reading that has hit a three-year high. The June FOMC meeting will serve as Walsh's first major test. Are you bullish on the Federal Reserve under Walsh's leadership?

<p>The eight-year Powell era at the Federal Reserve is drawing to a close, with incoming Chair Walsh set to take the helm this week. A proponent of "accelerating balance sheet reduction to create room for rate cuts," Walsh faces a formidable challenge right from the start: a CPI reading that has hit a three-year high. The June FOMC meeting will serve as Walsh's first major test. Are you bullish on the Federal Reserve under Walsh's leadership?</p>

8-year Powell era ends — Warsh takeover countdown begins!

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<p>The appointment of Warsh as Federal Reserve Chairman signals a potential shift in US monetary policy, moving from expectations of rate cuts to possible rate hikes. Warsh advocates for a data-driven approach to interest rates, emphasizing the need for high rates until inflation decreases significantly. He supports gradual balance sheet reduction and maintaining Fed independence, while proposing structural reforms to enhance market stability and reduce excessive intervention. His leadership may lead to a tightening monetary stance and a reassessment of inflation models.</p>

Has the expectation of a Fed rate cut reversed? What impact will Warsh's appointment have?