I just came across a rather interesting policy contradiction—Trump’s nominated new Federal Reserve Chair, Jerome Powell, advocates for both rate cuts and balance sheet reduction at the same time. At first glance, this seems self-contradictory, but the underlying logic is actually worth paying attention to.

Powell is 55 years old and was a candidate for Fed Chair as early as 2017. His background is impressive—serving on the Federal Reserve Board from 2006 to 2011, experiencing every step of the 2008 financial crisis. Back then, he was famously hawkish, even opposing QE2, firmly believing that easing policies would sow the seeds of inflation.

But nine years have passed, and he’s changed. Recently, in interviews, he said the Fed’s “hesitation to cut rates” was a major mistake, and even supported presidential pressure on the Fed. The person who was once most opposed to easing is now criticizing the Fed for not being accommodative enough.

His new framework is this: rate cuts stimulate the economy, while simultaneously accelerating balance sheet reduction. It sounds contradictory, but his logic is— the problem isn’t the level of interest rates, but that the Fed’s balance sheet is too large. It grew from less than $1 trillion before 2008 to nearly $9 trillion in 2022. Even after reductions, it still stands at $6.8 trillion. Such a massive balance sheet distortion has warped the financial environment: “Wall Street’s money is too cheap, while credit on Main Street is too tight.”

He believes that an AI-driven productivity revolution can drive growth under low interest rates, without worrying about runaway inflation. This marks a shift from being a inflation hawk to an optimistic believer.

What about the market impact? In the short term, stocks might benefit from rate cuts, but in the medium to long term, liquidity tightening will pose challenges. Over the past fifteen years, U.S. stock valuations have largely expanded due to Fed liquidity injections. If this engine stalls, markets will need new support. The bond market will see a steepening yield curve. The dollar is the hardest to predict—rate cuts usually weaken the dollar, but if Powell truly controls inflation while maintaining growth, the dollar could actually strengthen.

The most interesting part is Powell’s attitude toward Bitcoin. In 2022, he wrote a column calling crypto projects “a scam,” “worthless,” and said Bitcoin “is software, not currency.” But at the same time, he said Bitcoin could serve as a store of value like gold, even calling it a “good policeman for monetary policy”—meaning Bitcoin could impose discipline on central banks.

Even more intriguing is his investment record. This critic of crypto has invested in Bitwise, Basis, and even served as an advisor to Electric Capital. Typical Wall Street pragmatism: criticizing the asset class’s essence but still profiting from it. In other words—he doesn’t believe crypto will replace fiat currency, but he believes people will keep buying into the narrative.

If Powell truly implements this policy, the crypto market could face a fundamental shift. Over the past five years, crypto’s boom has been highly correlated with Fed liquidity. Balance sheet reduction means liquidity tightening, which is a new challenge for markets used to easing. Short-term rate cuts might trigger FOMO, but the long-term pressure from balance sheet reduction will be decisive.

This former inflation hawk is now walking a tightrope between rate cuts and balance sheet reduction. The market is watching to see if he will fall.