Walsh Pushes for Federal Reserve Reform as Balance Sheet Reduction Progresses Slowly

On September 25, 127 days after Kevin Walsh took office as the Chair of the Federal Reserve, the promised institutional reforms have begun to take shape. He has shortened the duration of the FOMC press conferences, adjusted the seating arrangements for reporters, weakened traditional forward guidance, and refused to provide personal interest rate forecasts in the dot plot, establishing a policy communication style that is markedly different from his predecessor. Walsh's new policy framework places greater emphasis on overall financial conditions rather than the traditional concept of neutral interest rates. He believes that neutral interest rates are only useful academically, and that the assessment of whether policy is tightening should consider asset prices, U.S. Treasury trading, the dollar exchange rate, credit costs and supply, as well as commodity prices. Given that the stock market, employment, and credit markets remain relatively strong, he may support further rate hikes if inflation remains persistently high. The Federal Reserve unanimously approved a 25 basis point rate hike last week, marking the first increase since 2023. The market currently anticipates a 70% probability of another rate hike in October, factoring in the possibility of up to two more hikes before March next year. However, Walsh's progress in reducing the Federal Reserve's $6.7 trillion balance sheet has been slow, with some FOMC members preferring to wait for the five working groups he established to submit their reports early next year; meanwhile, the yield on the 10-year U.S. Treasury has surpassed 5%, posing greater resistance to the Fed's current balance sheet reduction and increasing bond supply to the market.

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