GF Securities: Wosh Era Outlook - Three Shifts in the Federal Reserve's Policy Framework

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Source: Guo Lei Macro Tea Room

GaoFeng Securities Senior Macro Analyst Chen Jiali

Summary

First, on January 30, 2026, Trump announced he would nominate Wash to serve as the next Federal Reserve Chair, succeeding Powell, whose term will end in May. Trump reviewed Wash’s professional background in his statement, claiming Wash will become “one of the greatest Fed Chairs in history” (he will go down as one of the great Fed chairmen), and “will never let you down.” The nomination still requires hearings before the Senate Banking Committee and full Senate confirmation.

Second, Wash’s background is highly diverse, with practical experience in Wall Street mergers and acquisitions, White House economic policy work, and Fed crisis response. He served as Managing Director at Morgan Stanley responsible for M&A from 1995 to 2002, familiar with Wall Street operations; as Special Assistant for Economic Policy and Executive Secretary of the National Economic Council from 2002 to 2006; as a Fed Governor from 2006 to 2011. During the 2008 global financial crisis, he was the chief liaison between the Fed and Wall Street and a G20 representative. He resigned in 2011 due to opposition to QE2, believing that large-scale bond purchases distort markets and could lead to severe inflation and lax fiscal discipline in the future. After leaving the Fed, Wash became a senior visiting scholar at Stanford’s Hoover Institution and a partner at the Duken Family Office.

Third, regarding growth understanding, Wash belongs to the supply-side school. He believes the US economy’s below-potential growth is not due to insufficient aggregate demand but results from inefficient capital allocation and regulatory tightening that suppress the supply side. He thinks the Fed’s current understanding of potential growth underestimates the resilience of the US economy and overlooks the nonlinear growth potential brought by technological change. Wash believes the US is experiencing an AI-driven productivity boom. Increasing annual labor productivity growth by 1 percentage point could double living standards within a generation without causing inflation.

Fourth, on inflation, Wash sees it as primarily the Fed’s responsibility (Fed is chiefly responsible), not just a passive result of external shocks—that is, inflation is a choice (inflation is a choice). He criticizes the recent high inflation period, where the Fed blamed external factors, as a form of scapegoating, directly denying Powell’s logic that supply chain issues and the Russia-Ukraine conflict caused inflation in 2021–2022. His framework suggests the Fed will not excuse cost-push inflation; if tariffs or supply shocks push prices higher, his reaction would likely be tightening rather than waiting, contrasting sharply with Powell’s “transitory inflation” narrative.

Fifth, regarding interest rate policy, Wash’s past public statements tend to be hawkish, though Trump has repeatedly said Wash supports rate cuts. Based on Wash’s academic views and recent remarks, we lean toward expecting a gradual easing stance. His core logic involves re-evaluating the Fed’s policy path through a supply-side lens, where rate cuts are aimed at adapting to supply rather than demand. Wash believes the traditional Phillips curve relationship between unemployment and inflation has become ineffective, as AI-driven productivity surges are reshaping the US’s potential output, allowing strong growth without necessarily triggering inflation, thus providing room for lower rates. This aligns with Trump’s policy goal of reducing financing costs.

Sixth, on the relationship between monetary and fiscal policy, Wash advocates for a “New Treasury-Fed Accord.” In a previous CNBC interview, he proposed restructuring the Fed’s and Treasury’s roles, referencing the 1951 Treasury-Fed Agreement, to clearly delineate responsibilities. The core idea: the Fed should focus on interest rate management, while the Treasury handles government debt and fiscal accounts, with strict separation to prevent political influence on monetary policy. Regarding balance sheet management, Wash criticizes the Fed’s ongoing balance sheet expansion during stable times, viewing the current ~$7 trillion as an abnormal residual of multiple crises. He advocates accelerating balance sheet reduction and shortening asset durations to normalize policy.

Seventh, on market communication, Wash has publicly criticized Powell’s era for over-transparency, believing high-frequency, high-certainty signals weaken market price discovery and risk assessment. If Wash leads reform, the dot plot might be canceled or substantially revised, and public statements by Fed officials could be significantly reduced. This would reintroduce high uncertainty into policy paths, requiring markets to price in higher volatility premiums to hedge against reduced policy transparency.

Eighth, in simple terms, Wash’s policy ideas could lead to three shifts: first, from demand-side to supply-side policy analysis; second, from a multi-objective focus including financial stability back to a core focus on price stability; third, from high transparency to lower predictability in communication. The core is to use more flexible interest rate policies combined with supply-side capacity expansion to sustain growth, while managing potential inflation risks through balance sheet adjustments—forming a policy mix of wide interest rates and tight balance sheets. Two uncertainties remain: whether AI can substantively boost productivity at the macro level; and whether such productivity gains in a loose monetary environment will indeed prevent inflation. If not, markets may face rising term premiums and secondary inflation pressures.

Ninth, precious metals experienced a sharp decline on January 30. We interpret this as a result of prior gains, profit-taking, institutional long liquidation, and algorithmic trading effects. From the “Wash Effect” perspective, market concerns may include: (1) Wash’s rejection of debt monetization and his advocacy for balance sheet reduction. If the Fed significantly shrinks its balance sheet, it could favor dollar credit again, breaking key support levels for precious metals (expectation of credit currency devaluation); (2) despite Wash’s belief that new technologies could eliminate inflation, this remains a long-term narrative. He is hawkish on actual inflation issues, and markets worry that if short-term inflation spirals out of control, he would respond with resolute tightening. The US PPI data released on January 30 exceeded expectations, amplifying these concerns.

Main Text

On January 30, 2026, Trump announced he would nominate Wash as the next Fed Chair, succeeding Powell, whose term ends in May. Trump highlighted Wash’s professional background, claiming Wash will become “one of the greatest Fed Chairs in history” (he will go down as one of the great Fed chairmen), and “will never let you down.” The nomination still requires hearings before the Senate Banking Committee and full Senate approval.

On January 30, Trump announced he would nominate Kevin Wash as the next Fed Chair, succeeding Jerome Powell, whose term ends in May.

Trump highly praises Wash, calling him an “ideal candidate from Central Casting.” “Central Casting” was originally a name of an American casting company specializing in finding actors who fit specific roles. We interpret Trump’s use of this term as meaning Wash possesses qualities recognized on Wall Street—market acuity, connections, and crisis management experience—and, in Trump’s context, that Wash is someone likely to accept his vision.

Wash’s background is highly diverse, with practical experience in Wall Street M&A, White House economic policy, and Fed crisis response. He served as Managing Director at Morgan Stanley responsible for M&A from 1995 to 2002, familiar with Wall Street operations; as Special Assistant for Economic Policy and Executive Secretary of the National Economic Council from 2002 to 2006; as a Fed Governor from 2006 to 2011. During the 2008 global financial crisis, he was the primary liaison between the Fed and Wall Street and a G20 delegate. He resigned in 2011 due to disagreements over QE2, believing large-scale bond purchases distort markets and could lead to future inflation and fiscal laxity.

After leaving the Fed, Wash became a senior visiting scholar at Stanford’s Hoover Institution and a partner at the Duken Family Office.

His professional background is highly versatile. He served as Managing Director at Morgan Stanley from 1995 to 2002, gaining familiarity with Wall Street; from 2002 to 2006, as Special Assistant for Economic Policy and Executive Secretary of the NEC. He was a Fed Governor from 2006 to 2011, becoming the youngest ever at age 35. During the 2008 crisis, he was the main liaison between the Fed and Wall Street. He resigned in March 2011, mainly due to disagreements with Bernanke over QE2, believing it distorted markets and risked future inflation and fiscal discipline.

In terms of expertise, Wash has deep insights into financial cycles and liquidity fundamentals. As early as May 2008, before risks were fully recognized, he warned: “The global financial system is facing significant undercapitalization,” at a time when many policymakers still saw the subprime crisis as controllable.

In terms of practical experience, during the September 2008 Lehman and Bear Stearns collapses, Wash personally participated in urgent negotiations to transform Morgan Stanley into a bank holding company, securing Fed support and preventing a bank run.

Post-Fed, Wash’s views align with the supply-side school. He believes the US’s below-potential growth is due to inefficient capital allocation and regulatory tightening, not demand deficiency. He thinks the Fed underestimates the resilience of the US economy and overlooks the nonlinear growth potential from technological change. He sees the US experiencing an AI-driven productivity boom. Increasing annual productivity growth by 1 percentage point could double living standards within a generation without inflation.

Wash’s understanding of US growth is rooted in supply-side theory, contrasting sharply with Powell’s demand management framework. In his speech “Rejecting the Requiem,” he criticized reliance solely on demand stimulation:

“Policymakers should also take notice of the critical importance of the supply side of the economy. The supply side establishes its productive capacity. It is a function of the quality and quantity of labor and capital assembled by our companies. Recovery after a recession demands that capital and labor be reallocated. But, the reallocation of these resources to new sectors and companies has been painfully slow and unnecessarily interrupted.”

He believes that the past 15 years of Fed policies, especially QE and prolonged low rates, have not unleashed economic potential but distorted capital allocation, diverting resources from productive investment to financial speculation. In a 2025 Wall Street Journal column, he argued that Wall Street’s money is too loose, while Main Street’s credit is too tight. The Fed’s enormous balance sheet, supporting big firms during crises, should be significantly reduced.

“Money on Wall Street is too easy, and credit on Main Street is too tight. The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly.”

Furthermore, Wash believes the growth bottleneck is not demand but structural supply-side issues—excessive regulation, capital misallocation, and central bank distortions of market signals.

Pro-growth policies also require reform in regulatory conduct, providing clearer, more timely, and consistent rules so firms—financial and otherwise—can innovate in a changing economy. It should allow firms to succeed or fail without protecting incumbents at the expense of smaller, more dynamic competitors.

More notably, Wash remains optimistic about technological change and productivity growth. He believes the Fed’s current potential growth estimates seriously underestimate US resilience, especially ignoring the nonlinear leaps from AI and general-purpose technologies. In his April 2025 G30/IMF speech, Wash emphasized productivity as key to inflation-free prosperity:

“Productivity is the key to prosperity without inflation. If we can raise labor productivity growth by even one percentage point annually, we can double living standards in a single generation—and do so without triggering price instability.”

This implies that if the Fed continues to interpret the economy through an outdated Phillips curve framework, equating strong growth with inflation risk, it may prematurely tighten, stifling the endogenous growth momentum from productivity booms. Wash’s framework suggests that under an AI-driven new economy, the Fed should tolerate higher real growth without inflation concerns, provided monetary discipline is restored and capital flows into productive investments rather than speculative assets.

Regarding inflation, Wash sees it as chiefly the Fed’s responsibility, not just a passive external shock—that is, inflation is a choice. He criticizes the recent high inflation period, where the Fed blamed external factors, as a form of scapegoating, denying Powell’s logic that supply chain issues and the Russia-Ukraine war caused inflation in 2021–2022. His framework indicates the Fed will not excuse cost-push inflation; if tariffs or supply shocks push prices higher, his response would likely be tightening rather than waiting, contrasting sharply with Powell’s “transitory inflation” narrative.

In a July 2025 Hoover Institution interview, Wash stated he believes Milton Friedman’s view that inflation is a choice. Congress in the 1970s assigned the responsibility for price stability to the Fed, aiming for an independent agency accountable for prices, not blaming others. He argues that when policymakers ignore problems and blame others, inflation risks spiral. When the Fed acts sluggishly or lacks resolve, inflation embeds itself in price formation.

He also noted that recent commentary obscures the fact that inflation is a choice. During the recent years of high inflation, causes cited included Putin’s Ukraine invasion, the pandemic, and supply chains. Milton Friedman would be outraged to hear that.

“I believe what Milton Friedman and you just channeled, which is inflation is a choice… Inflation and ensuring price stability was granted to the Federal Reserve by Congress most recently in a review of its statutes in the 1970s. So that there would be one agency responsible for prices. No more blaming the other guy. We’re giving the baton to you, the Central Bank.”

“Now you wouldn’t know from recent commentary of the last several years that inflation was a choice. In fact, during the run-up to the great inflation of the last five or six years, what did we hear about the causes of inflation? It was because of Putin in Ukraine. It was because of the pandemic and supply chains. Well, Milton would be outraged to hear that.”

We understand that Wash’s framework implies the Fed will not excuse cost-push inflation. If tariffs or supply shocks push prices higher, his reaction would likely be tightening rather than tolerating, sharply contrasting with Powell’s “transitory inflation” narrative.

On interest rate policy, Wash’s past public statements tend to be hawkish, though Trump has repeatedly said Wash supports rate cuts. Based on Wash’s academic views and recent remarks, we lean toward expecting a gradual easing stance. His core logic involves re-evaluating the Fed’s policy path through a supply-side lens, where rate cuts are aimed at adapting to supply rather than demand. Wash believes the traditional Phillips curve relationship between unemployment and inflation has become ineffective, as AI-driven productivity surges are reshaping the US’s potential output, allowing strong growth without necessarily triggering inflation, thus providing room for lower rates. This aligns with Trump’s policy goal of reducing financing costs.

Wash argues that the Fed should not mechanically maintain high rates just because economic data are strong. If growth is driven by productivity—especially AI infrastructure and applications—such growth is inherently disinflationary. He criticizes the current Fed models for overemphasizing demand-side pressures and neglecting supply-side expansion.

He believes high wages and strong growth do not necessarily cause inflation. As long as productivity increases faster than money supply and government spending, rates can be lowered to support long-term capital investment cycles.

“The dogmatic belief that inflation occurs when workers earn too much should be discarded… AI would boost productivity, strengthen U.S. competitiveness, and act as a disinflationary force.”

Additionally, Wash has long criticized the Fed’s view that high economic growth causes inflation. He attributes the Fed’s misjudgment in 2021–2022 to trying to fine-tune demand while ignoring structural supply shocks and excessive government money printing.

“The Fed’s models wrongly assume rapid growth threatens inflation. Instead, inflation is caused when government spends and prints too much.”

This suggests that under Wash’s management, the Fed might no longer see GDP growth above 3% as overheating, avoiding preemptive rate hikes to curb growth. In a October 2025 interview, he mentioned that rates could be significantly lowered to make 30-year fixed mortgages affordable and restart the housing market. The way to do this is to reduce the balance sheet and withdraw money from Wall Street.

“We can lower interest rates a lot, and in so doing get 30-year fixed-rate mortgages so they’re affordable, so we can get the housing market to get going again. And the way to do that is, as you say, to free up the balance sheet, take money out of Wall Street.”

Regarding the relationship between monetary and fiscal policy, Wash advocates for a “New Treasury-Fed Accord.” In a previous CNBC interview, he proposed restructuring the roles of the Fed and Treasury, referencing the 1951 agreement, to clearly define responsibilities. The core idea: the Fed should focus on interest rate management, while the Treasury handles government debt and fiscal accounts, with strict separation to prevent political influence. On balance sheet management, Wash criticizes the Fed’s ongoing expansion during stable times, viewing the current ~$7 trillion as an abnormal residual of crises. He advocates accelerating balance sheet reduction and shortening asset durations to normalize policy.

In a July 2025 CNBC interview, Wash said, “We need a new Treasury-Fed accord, like we did in 1951 after another period of debt buildup, where the central bank and Treasury had conflicting goals. That’s where we are now. If we have a new accord, then the Fed Chair and Treasury Secretary can clearly and carefully tell markets: ‘This is our target for the size of the Fed’s balance sheet.’” In a May 2025 Hoover Institution interview, he emphasized that the Treasury Secretary should be responsible for fiscal policy, not muddled with the Fed, to prevent politics from influencing monetary policy.

“We need a new Treasury-Fed accord, like we did in 1951 after another period where we built up our nation’s debt and we were stuck with a central bank that was working at cross purposes with the Treasury. That’s the state of things now. So if we have a new accord, then the Fed chair and the Treasury Secretary can describe to markets plainly and with deliberation, ‘This is our objective for the size of the Fed’s balance sheet.’”

He believes the Fed’s balance sheet should be used for emergencies, and when crises occur, the Fed should exit (shrink the balance sheet).

However, current bank reserve levels have declined from their peaks, and further balance sheet reduction faces liquidity constraints. Therefore, Wash’s framework might include coordinating with the Treasury on debt issuance structures, adjusting reserve requirements, or using other tools to implement shadow balance sheet reduction. Specific operational details remain to be clarified.

On market communication, Wash has criticized Powell’s era for over-transparency, believing high-frequency, high-certainty signals weaken market price discovery and risk assessment. If Wash leads reform, the dot plot might be canceled or substantially revised, and the frequency of Fed officials’ public statements could be significantly reduced. This would reintroduce high uncertainty into policy paths, requiring markets to price in higher volatility premiums to hedge against reduced policy predictability.

In August 2016, the Wall Street Journal published an article titled “The Federal Reserve Needs New Thinking,” where Wash argued that recent monetary policy has been deeply flawed, and a robust reform agenda should include stricter review of recent policy choices and major changes in tools, strategies, communication, and governance.

“The conduct of monetary policy in recent years has been deeply flawed… A robust reform agenda requires more rigorous review of recent policy choices and significant changes in the Fed’s tools, strategies, communications, and governance.”

In summary, Wash’s policy ideas could lead to three shifts: first, from demand-side to supply-side policy analysis; second, from a multi-objective focus including financial stability back to a core focus on price stability; third, from high transparency to lower policy predictability. The core is to use more flexible interest rate policies combined with supply-side capacity expansion to sustain growth, while managing potential inflation risks through balance sheet adjustments—forming a policy mix of wide interest rates and tight balance sheets. Two uncertainties remain: whether AI can substantively boost macro productivity; and whether such productivity gains in a loose monetary environment will indeed prevent inflation. If not, markets may face rising term premiums and secondary inflation pressures.

Precious metals experienced a significant decline on January 30. We interpret this as a result of prior gains, profit-taking, institutional long liquidation, and algorithmic trading effects. From the “Wash Effect” perspective, market concerns may include: (1) Wash’s rejection of debt monetization and his advocacy for balance sheet reduction. If the Fed significantly shrinks its balance sheet, it could favor dollar credit again, breaking key support levels for precious metals (expectation of credit currency devaluation); (2) despite Wash’s belief that new technologies could eliminate inflation, this remains a long-term narrative. He is hawkish on actual inflation issues, and markets worry that if short-term inflation spirals out of control, he would respond with resolute tightening. The US PPI data released on January 30 exceeded expectations, amplifying these concerns.

Risk Warning: If inflation falls less than expected or fiscal easing triggers demand overheating, the Fed may keep high rates longer. Geopolitical uncertainties and potential tariff policy changes could impact supply chain recovery. If macro data deviate from a soft landing path, current asset prices priced in rate cuts and a soft landing could face sharp valuation corrections.