What does the nomination of Waller mean for the Federal Reserve?

On January 30th, Beijing time, Trump nominated Walsh to replace Powell as Chairman of the Federal Reserve. This Wall Street veteran and loyalist to the president, who served as a Federal Reserve governor during the 2008 financial crisis, has publicly stated that his monetary policy stance aligns with Trump. However, this does not mean that the Federal Reserve will fully comply with the president's economic agenda, as the authority to make interest rate decisions lies with the Federal Open Market Committee, and the chairman only has one vote.

The 55-year-old Walsh was close to being nominated by Trump as Chairman of the Federal Reserve in 2017, and this re-nomination indicates that Trump is attempting to push for a shift in monetary policy towards interest rate cuts through personnel adjustments. Recently, Walsh has advocated for comprehensive reforms at the Federal Reserve, including significantly reducing the size of the balance sheet to pave the way for interest rate cuts, which is highly consistent with Trump's policy goal of lowering interest rates.

However, even if Walsh assumes the chairmanship, his actual ability to promote a shift in monetary policy will be significantly constrained. All monetary policy actions require majority support from the Federal Open Market Committee to be implemented, and as chairman, he only has one vote. If other committee members have doubts about the economic rationale for further interest rate cuts, Walsh may find it more difficult than his predecessor to build consensus and guide policy direction.

Dual Background in Wall Street and Public Service

After graduating from Harvard Law School, Walsh worked at Morgan Stanley for seven years before joining the White House economic advisory team under George W. Bush in 2002. In 2006, he was appointed as a Federal Reserve governor during Bush's presidency at the age of 35, becoming the youngest person to hold that position in history. During the 2008 financial crisis, he leveraged his Wall Street connections to help facilitate the sale of several banks on the brink of collapse.

In 2011, Walsh resigned from his governorship in opposition to the Federal Reserve's implementation of a second round of quantitative easing (a non-conventional measure aimed at boosting a weak economic recovery). Since then, he has served as an advisor to the Duke family office and held board positions at several companies; at the same time, he has been a researcher at the conservative Hoover Institution and a lecturer at Stanford Business School. Over the years, Walsh has continued to provide economic policy advice to Trump.

Walsh's wife is Jane Lauder, and his father-in-law, Ronald Lauder, is a significant Republican donor and a classmate of Trump at Wharton. In March of this year, Ronald Lauder donated $5 million to the pro-Trump super PAC MAGA.

Policy Advocacy for Balance Sheet Reduction and Interest Rate Cuts

Since leaving the Federal Reserve, Walsh has publicly criticized the institution's policies multiple times, particularly its ongoing expansion of the balance sheet. Recently, he has further proposed comprehensive reforms at the Federal Reserve, which align with some of Trump's policy goals, the most central of which is to promote lower interest rates.

During his tenure as a Federal Reserve governor, Walsh was cautious about interest rate cuts due to concerns over inflation risks. However, his stance has shifted, advocating that the Federal Reserve should significantly reduce the size of the balance sheet to create policy space for future interest rate cuts by withdrawing liquidity from the financial system. However, this plan has also faced some skepticism, with opinions suggesting that the actual effect of balance sheet reduction on lowering interest rates may be limited In addition, Walsh also called for reforms to the Federal Reserve's inflation analysis framework, economic forecasting methods, and the mechanisms that rely on model-driven decision-making, but did not elaborate on specific operational details. He also proposed reducing the size of the Federal Reserve's workforce, a suggestion that resonates with Trump's consistent policy focus on reducing federal government personnel.

Real Constraints on Presidential Power

Walsh's actual influence in pushing for a shift in monetary policy will be significantly constrained. The Federal Open Market Committee has the authority to decide on interest rates, and as chairman, Walsh only has one vote; any monetary policy action requires the support of at least four other voting members of the committee to form a majority decision. Given the current complex economic situation, reaching a consensus is not easy.

Although members of the Federal Open Market Committee have historically shown a considerable degree of respect for the chairman, especially when the chairman focuses on building consensus rather than forcing dominance, there have been historical precedents where leadership has been challenged. For example, Paul Volcker faced fierce opposition in the early 1980s when combating inflation; recently, Powell encountered significant internal resistance when pushing for a third consecutive rate cut last December.

If other Federal Reserve officials question the economic rationale for further rate cuts, Walsh may find it more difficult to garner sufficient support than his predecessors. However, in areas outside of monetary policy, Walsh will have greater autonomy to implement changes, such as adjusting senior personnel or implementing significant layoffs. If he can gain majority support on the seven-member Board of Governors (which may require waiting for the new governor to take office), he may even have the authority to dismiss non-cooperative regional Federal Reserve presidents.

Tests of Independence

Appointing a chairman who is highly aligned with the president's policy stance does not necessarily mean the end of the Federal Reserve's independence, as previously mentioned. More crucial is the subsequent developments: how much resistance will other policymakers show when the pressure to cut rates comes from within the Federal Reserve? Who might become the core force opposing this within the Federal Open Market Committee?

Another important variable is the lawsuit triggered by Trump's previous attempt to dismiss Federal Reserve Governor Lisa Cook based on unverified mortgage fraud allegations. The U.S. Supreme Court held a hearing on this case on January 21, focusing on whether Cook could continue to serve during the lower court proceedings. During the hearing, judges generally expressed skepticism towards the government's arguments.

If Trump ultimately wins this case, or is merely allowed to dismiss Cook during the litigation, it would effectively open the door for the president to dismiss more governors at his personal discretion, potentially undermining the strong independence framework that the central bank has maintained for a long time. However, the Supreme Court has recently signaled in a preliminary ruling on a related case that even if the president is allowed to expand his powers over other federal agencies, there may be intentional special protective boundaries set for the Federal Reserve.

Additionally, Powell will step down as chairman in May, but if he wishes, he can remain as a Federal Reserve governor until 2028. He has not yet disclosed his final choice. If he decides to stay on as a governor, it would not only directly constrain Walsh's dominance in monetary policy but also constitute a significant counterbalance to the president's will. Most observers analyze that Powell's recent public display of hesitation is intended to send a signal to the White House to dissuade Trump from nominating a chairman with a more unconventional stance; Once Waller's nomination is confirmed, Powell is likely to choose to completely leave the Federal Reserve