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What Is the Impact of the Fed Entering the "Wash Era"?

On May 22 local time, the inauguration ceremony of the new Chair of the U.S. Federal Reserve, Kevin Wash, was held at the White House, hosted by President Trump. This ceremony sent intriguing signals—the last time a Fed chair took office at the White House was in 1987, nearly 40 years ago, when President Reagan appointed Greenspan as Fed Chair.

The White House’s special attention to this Fed session also sparks market speculation: Will Wash’s leadership challenge the independence of Fed policy? What direction will U.S. monetary policy take next, and how will it impact global markets?

Wash Faces Multiple Tests as Fed Chair

The 56-year-old Wash is most notably labeled as "hawkish" early in his career, but in recent years has advocated for "practical monetarism." From 2006 to 2011, he served as a Fed governor, becoming the youngest in Fed history. Trump interviewed Wash for Fed Chair in 2017 but ultimately chose Powell.

Returning to the Fed after 15 years to assume the top role, Kevin Wash carries high expectations and must confront complex challenges from economic and political levels.

Economically, rising energy prices caused by Middle East tensions have increased inflationary pressures in the U.S. Data shows that in April, the U.S. Consumer Price Index (CPI) rose 3.8% year-over-year, the highest since June 2023. Additionally, the Producer Price Index (PPI) increased 6% YoY in April, a new high since December 2022; PPI rose 1.4% month-over-month, the largest monthly increase since March 2022.

Politically, balancing White House calls for rate cuts with Fed independence is difficult. Since starting his second term, Trump has repeatedly expressed dissatisfaction with Fed monetary policy, pressuring Powell to cut rates, raising concerns about Fed independence.

Although recent White House pressure for rate cuts has eased, Trump’s comments on monetary policy continue to unsettle market expectations. During Wash’s inauguration, Trump said he hopes Wash will be a "completely independent" chair. But he also mentioned, "We also want to curb inflation, but not hinder economic prosperity."

On the internal decision-making front, the Fed faces its most serious divisions since 1992. At the April FOMC meeting, four dissenting votes were cast: one governor advocated a 25 basis point rate cut, while three regional Fed voters supported holding rates steady but opposed including dovish language in the policy statement.

Meanwhile, Powell broke tradition by remaining on the Fed board after stepping down as Chair. Although he promised to stay "low-profile" and not act as a "shadow chairman," the delicate coexistence of the "new and old" chairs could make internal decision-making more complex.

Wash’s policy proposals mainly include four aspects:

1. A "balance sheet reduction + rate cut" policy combination. Wash advocates distinguishing between interest rate policy and balance sheet policy, emphasizing rebuilding monetary credibility through shrinking the balance sheet. When inflation prospects improve and productivity rises, he supports rate cuts to ease financing pressures on the real economy and respond to political calls for easing.

2. "Recalibration" of inflation targets. Wash does not advocate openly changing the 2% inflation goal but prefers to reassess inflation measurement and analysis frameworks, downplaying precise target metrics in operational terms, and focusing more on long-term inflation expectations, potential trends, and supply-side changes driven by AI, such as productivity, affecting inflation outlook.

3. Reducing forward guidance. Wash favors decreasing explicit commitments to future interest rate paths, advocating for decisions based on data and meetings, step by step. He is also dissatisfied with Fed officials frequently issuing forward guidance, believing it weakens policy flexibility.

4. Easing financial regulation. He believes the Fed should focus on core functions like price stability and reduce intervention in non-traditional issues such as climate change and social equity.

Wash’s first test will be the FOMC meeting on June 16-17. At this meeting, he will issue his first FOMC statement as chair and answer press questions. This will be the first key moment to observe the policy orientation of the "Wash era."

While awaiting Wash’s debut, market expectations for a rate cut within the year have already faded. The CME FedWatch tool shows that, so far, the market assigns nearly a 70% probability that the Fed will raise rates at least once by the December meeting this year. $PDD $ORCL