Author: Tiezhu Ge on Crypto

Years later, facing the newly appointed Kevin Warsh and the constant public pressure from Trump, Powell may recall that morning when he first walked into the Federal Reserve Chairman's office.

It was an era when everything seemed to be under control, even though the world's rightward shift was inevitable.

At the time, 64-year-old Powell had no idea that he was about to become the longest-serving chairman in the history of the Federal Reserve to be in an abnormal situation: he would face the pandemic, unprecedented fiscal expansion, runaway inflation, asset bubbles, geopolitical divisions, and be forced to push the Federal Reserve to the forefront of the storm time and time again in the midst of crises.

I. Redefining the Federal Reserve: No More Guaranteeing, Is it Dovish or Hawkish?

For a long time, the Federal Reserve was no longer just a central bank. It became the buyer of last resort in the market, a shadow ally of the treasury, the lender of last resort for banks, and the guarantor of the bottom line.

Powell, too, was gradually transformed from a technocrat known for his prudence and expertise in managing expectations into the guardian of this massive and bloated system by the times.

 Interest rates fluctuated dramatically during Powell's eight years in office.

Even today.

When Kevin Warsh's name is set to become the next Federal Reserve Chairman, what truly changes is not merely a label of so-called hawk or dove, but a redefinition of the Federal Reserve's role in an era.

Walsh is not a hawk who is obsessed with quantitative tightening in the traditional sense, nor is he a dove who only cuts interest rates to protect the market, nor is he simply an anti-establishment figure.

What he truly represents is a question that the Federal Reserve, as a new era entity, must answer against the backdrop of growing market skepticism about the sustainability of the massive national debt: should the Federal Reserve still bear the responsibility of bailing out all debt problems?

In his arguments, Warsh repeatedly mentions radical reform, which is not just a change in the path of interest rates or an adjustment in the size of the balance sheet, but a systematic reflection on the logic of monetary policy over the past fifteen years. This extreme form of modified Keynesianism is coming to an end.

The history of using demand management as its core and asset price booms to mask productivity stagnation has reached a dead end.

For Trump, Warsh was a manageable reformer: he was willing to lower interest rates, understood the reality of debt, and, unlike Hassett, did not have a strong political sympathy, thus preserving the necessary independence and dignity of the central bank.

To Wall Street, Warsh was a man of rules: he emphasized monetary and fiscal discipline, opposed unconditional QE, and preferred to manage the market through institutional adjustments rather than monetary policy intervention.

As mentioned in a previous sharing session, the Fed Put may cease to exist in the next four years. Instead, we may see more restrained central banks, clearer boundaries of responsibility, and more frequent and genuine market volatility. All of this will require an uncomfortable adjustment period for all market participants.

II. The gravitational field in reality: How long will it take for a true return to occur, and is it even possible?

Before Warsh took office, the general sentiment was pessimistic. After all, according to Warsh's ideas, there would be a large-scale reduction in the balance sheet and a strong fight against inflation.

However, the current US economy is in a state of high fragility yet extremely dependent on the narrative of stability: the fiscal deficit is high, debt interest payments are nearing the brink of getting out of control, real estate and medium- and long-term financing are highly dependent on long-term interest rates, and the capital market has long been accustomed to policy bailouts.

Warsh's proposed combination of interest rate cuts, balance sheet reduction, and a smaller central bank means that: it requires the government to face costs again and enforce discipline; it requires the market to assume risks independently again; and it requires the Federal Reserve to relinquish the bailout power accumulated over the past fifteen years.

This path is not impossible; it is logically sound and conforms to common sense. However, from a practical perspective, the margin for error left for Walsh is actually quite small, and it heavily tests his ability to control the pace.

Once quantitative tightening pushes up term premiums and raises medium- and long-term interest rates, it will suppress housing, investment, and employment.

Once the market experiences sharp fluctuations as the central bank ceases to bail it out; once voters feel the real cost of the so-called return to discipline.

The pressure from the political system on the Federal Reserve will quickly return to familiar directions: halt balance sheet reduction, slow down reforms, and prioritize stable growth.

Over the years, both voters and capital markets have developed a strong path dependency through repeated crises. This inertia cannot be completely broken by a single personnel change.

A more realistic assessment is that Walsh may push for a change in direction, but a true return to the original purpose is unlikely to happen overnight.

III. From Trump's Perspective: Another Solution to Walsh's Rise to Power

It is well known that Trump has always needed low interest rates.

However, at the same time, in the early stages of his term, he also launched a high-profile Musk-style efficiency reform, attempting to drastically reduce government spending and reshape fiscal discipline. These two goals—low interest rates and spending cuts—are inherently contradictory within the traditional framework.

So, an even more interesting question arises: if Trump is unwilling to rely entirely on dovish central banks to bail him out, and is aware that the fiscal situation is close to getting out of control, then is choosing Walsh an unconventional solution in itself?

At this stage, the US fiscal deficit and debt levels are approaching a critical inflection point. Continuing with the dovish path of the past fifteen years—more aggressive interest rate cuts, more direct central bank intervention, and increasingly blurred monetary and fiscal boundaries—may seem to bring temporary market stability, but in reality, it is constantly eroding the dollar's credibility and exacerbating inflation.

The political comfort zone along this path is very short, and the probability of it going wrong is extremely high. Once inflation rebounds and long-term interest rates spiral out of control, the responsibility will almost inevitably fall back on the White House itself.

What we must always understand is that Trump has always been a master of scapegoating. Walsh's value lies not in his apparent ineffectiveness, but in the ability to use him to pressure Congress.

If, under Warsh's leadership, the Federal Reserve explicitly refuses to continue to bail out the government and refuses to unconditionally suppress term premiums, then rising interest rates, exposed financing costs, and explicit fiscal pressures will no longer be direct consequences of political decisions, but rather natural results of market discipline.

What will this mean? For Congress, the continued unrestrained expansion of spending will quickly become unsustainable; for the fiscal system, cuts to welfare and reductions in the deep budget will, for the first time, have a real basis for being forced to happen, rather than relying on Musk-style patching up of loopholes.

Even if this path doesn't work, even if the market reacts too strongly and the pace of reform is forced to slow down, Walsh is still a perfect scapegoat.

Alternatively, Walsh doesn't even need to succeed in reform; simply exposing the problems fully would be enough to change the current power struggle between Trump, Congress, and the Democrats.

This may be the most realistic and cruel political significance of Walsh's rise to power.

IV. Facing the Future of Debt: Trading Time for Space, There is No One-Stop Solution

If we broaden our perspective further, we will find that both Walsh's reform vision and Trump's political strategy are ultimately constrained by the same reality: the United States has entered a debt-driven era.

The size of the debt reveals a harsh reality: the United States no longer has the policy freedom to completely correct its mistakes; it is left with only the choice of how to delay and how to transfer the debt.

This is why trading time for space becomes the only feasible, but also the least dignified, path. Lowering interest rates trades future inflation risks for easing current interest rate pressures; reducing the balance sheet attempts to repair the central bank's credit through institutional discipline; and fiscal reform trades political conflict and electoral costs for a temporary smoothing of the debt curve.

However, these choices conflict with and hinder each other, and none of them can complete the closed loop independently.

What Walsh was really facing was not the question of whether or not to reform, but rather:

In a highly financialized, politically polarized, and debt-ridden system, how much real cost can reform bear?

From this perspective, no matter who comes up, they cannot provide a solution that will solve the problem once and for all.

This also means that over the next four years, the market will not need to adapt to a single policy shift, but rather to a longer-term and more volatile situation. Interest rates will not return to the comfort zone of zero, but they will also be difficult to maintain at high levels for an extended period; the central bank will no longer unconditionally bail out the market, but it is also impossible for it to truly abandon its responsibilities; the crisis will not be completely avoided, but will only be postponed and broken up.

In such a world, macroeconomic policies no longer solve problems, but only manage them.

And this may be the ultimate point to understand Kevin Walsh and Trump's strategy: they are not competing for a better answer, but in an era without a good answer, they are vying for who will decide the costs of the past and how they should be distributed now.

This is not a story about prosperity.

It's just the beginning of an era where reality, debt, and supply constraints are becoming more explicit.