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

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Source: Guo Lei Macro Tea Room

Senior Macro Analyst at GF Securities, 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” 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, and Fed crisis response. From 1995 to 2002, he served as Managing Director at Morgan Stanley responsible for M&A, familiar with Wall Street operations; from 2002 to 2006, he was Special Assistant to the White House Economic Policy and Executive Secretary of the National Economic Council. He served as a Federal Reserve Board member 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. In 2011, he resigned over opposition to the second round of quantitative easing (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, 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—not a passive result of external shocks—meaning inflation is a choice. He argues that during recent high-inflation periods, blaming external factors was a way to shift responsibility, directly denying Powell’s explanation that supply chains 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 is more likely to be tightening rather than waiting. This sharply contrasts with Powell’s “transient inflation” narrative.

Fifth, on interest rate policy, Wash’s past public statements are generally hawkish, but 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, viewing rate cuts not as demand suppression but as accommodating supply. Wash believes the traditional Phillips curve relationship between unemployment and inflation has become ineffective, as AI-driven productivity gains 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, regarding the relationship between monetary and fiscal policy, Wash advocates for a “New Treasury-Fed Accord.” In a previous CNBC interview, he explicitly proposed restructuring the Fed’s and Treasury’s roles, referencing the 1951 Treasury-Fed Agreement to redefine responsibilities. His core proposal is that the Fed should focus on interest rate management, while the Treasury handles government debt and fiscal accounts, with clear separation to prevent political influence on monetary policy. On balance sheet management, Wash criticizes the Fed’s ongoing balance sheet expansion during stable periods, viewing the current ~$7 trillion size as an abnormal residual from 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 could be canceled or substantially revised, and public statements by Fed officials might 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 dual focus on financial stability and macroeconomic management 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. The validity of this framework depends on two factors: whether AI can substantially boost productivity at the macro level, and whether such productivity gains in a loose monetary environment do not trigger inflation. If these do not materialize as expected, markets may face rising term premiums and secondary inflation pressures.

Ninth, precious metals experienced a sharp decline on January 30. We interpret this as related to 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, boosting the dollar index and breaking key support levels for precious metals (expectation of currency depreciation). (2) Although Wash believes new technologies can eliminate inflation, this is a long-term narrative; he remains hawkish on actual inflation, and markets worry that if short-term inflation spirals out of control, he would respond with resolute tightening. The unexpectedly high US PPI data on January 30 amplified 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 diverse background and claimed he would become “one of the greatest Fed chairs in history” and “will never let you down.” The nomination still requires Senate Banking Committee hearings 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.” The phrase “Central Casting” originally refers to an American casting agency known for finding actors who perfectly fit specific roles. We interpret Trump’s use of this term as indicating that Wash possesses qualities recognized on Wall Street—market acuity, connections, crisis management experience—and that he is someone likely to align with Trump’s vision.

Wash’s background is highly diverse, with practical experience in Wall Street M&A, White House economic policy, and Fed crisis response. From 1995 to 2002, he was Managing Director at Morgan Stanley responsible for M&A, familiar with Wall Street operations; from 2002 to 2006, he served as Special Assistant to the White House Economic Policy and Executive Secretary of the National Economic Council. He was a Fed Board member 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 and a G20 delegate. In 2011, he resigned over disagreements with Bernanke’s QE2, believing large bond purchases distort markets and risk 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 expertise includes a deep understanding of financial cycles and liquidity fundamentals. In May 2008, before risks were fully recognized, Wash warned that “the global financial system is facing significant undercapitalization,” at a time when many policymakers still saw the subprime crisis as manageable.

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

Post-Fed, Wash advocates a supply-side approach, believing the US’s below-potential growth stems from inefficient capital allocation and regulatory tightening. He argues the Fed underestimates the resilience of the US economy and overlooks nonlinear growth potential from technological change. He sees the US 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.

Wash’s view on US growth aligns with supply-side economics, contrasting sharply with Powell’s demand management framework. In his speech “Rejecting the Requiem,” he criticized reliance solely on demand stimulation, emphasizing the importance of supply-side capacity.

He states: “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 criticizes the past fifteen years of Fed policies, especially QE and prolonged low rates, for distorting capital allocation and diverting resources from productive investments to financial speculation. In a 2025 Wall Street Journal column, he argued that “Wall Street’s money is too loose, and Main Street’s credit is too tight.” He advocates reducing the Fed’s enormous balance sheet, which supports post-crisis corporate needs, to restore normalcy.

He believes the bottleneck to growth is not insufficient demand but structural supply-side barriers—excessive regulation, capital misallocation, and market price distortions caused by central banks.

Pro-growth policies also require reforming regulatory practices to provide clearer, more timely, and consistent rules, enabling innovation and allowing firms to succeed or fail without protecting incumbents at the expense of smaller, more dynamic competitors.

He remains optimistic about technological change and productivity growth, believing the Fed’s current potential growth estimates are too low, especially overlooking AI’s nonlinear productivity leaps. In a 2025 G30/IMF speech, Wash emphasized: “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 suggests that if the Fed continues to rely on outdated Phillips curve models, equating strong growth with inflation risk, it may prematurely tighten, stifling the endogenous growth momentum driven by productivity gains. Wash’s framework implies that under an AI-driven economy, the Fed should tolerate higher real growth without inflation concerns, provided monetary discipline is maintained and capital flows into productive investments rather than speculative assets.

Regarding inflation, Wash sees it as chiefly the Fed’s responsibility—not a passive external shock—meaning inflation is a choice. He criticizes recent high-inflation periods for blaming external factors, denying Powell’s explanation that supply chains and geopolitical conflicts caused inflation in 2021–2022. His view indicates the Fed will not excuse cost-push inflation; if tariffs or supply shocks raise prices, he is more likely to tighten rather than wait. The unexpectedly high US PPI data on January 30 heightened these concerns.

In a July 2025 Hoover Institution interview, Wash stated: “I believe what Milton Friedman and you just channeled—that inflation is a choice. Congress granted the Fed the responsibility for price stability in the 1970s. The idea was to have one agency responsible for prices, no more blaming others. We’re giving the baton to you, the central bank.” He added that recent commentary obscures the fact that inflation is a policy choice, citing causes like Putin’s Ukraine invasion, the pandemic, and supply chains as false explanations. He would be outraged to hear such claims.

His framework suggests the Fed will not excuse cost-push inflation; if tariffs or supply shocks push prices higher, he would likely respond with tightening, contrasting sharply with Powell’s “transient inflation” narrative.

On interest rate policy, Wash’s past public statements are generally hawkish, but Trump has repeatedly said Wash supports rate cuts. Based on Wash’s academic views and recent remarks, we expect a gradual easing stance. His core logic involves re-evaluating the policy path through a supply-side lens, viewing rate cuts as accommodating supply rather than demand. He believes the traditional Phillips curve relationship has broken down due to AI-driven productivity, allowing strong growth without inflation, thus providing room for lower rates. This aligns with Trump’s goal of reducing financing costs.

He argues that the Fed should not mechanically keep rates high 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 Fed’s overemphasis on demand-side pressures and neglect of supply-side expansion.

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

“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.”

He also criticizes the Fed’s view that high growth causes inflation, arguing that Powell’s misjudgment in 2021–2022 stemmed from trying to fine-tune demand while ignoring structural supply shocks and 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 implies Wash’s Fed might no longer see over 3% GDP growth 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 by releasing the balance sheet—taking money out of 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.”

On the monetary-fiscal relationship, 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 Fed should focus on interest rate management, while the Treasury handles debt and fiscal accounts, with strict separation to prevent political influence. He criticizes the current large balance sheet as a residual of crisis support, advocating for faster reduction and shorter durations to normalize policy.

In a July 2025 CNBC interview, Wash said: “We need a new Treasury-Fed accord, like in 1951, after a period of debt buildup, when the central bank and Treasury had conflicting goals. That’s where we are now. If we have a new accord, 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.

“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 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 reserved for emergencies, and when crises occur, the Fed should exit (shrink). However, current reserve levels have declined from peak, limiting further balance sheet reduction. His framework may include coordinating with the Treasury on debt issuance, adjusting reserve requirements, or other tools to implement a shadow balance sheet reduction—details remain to be confirmed.

Regarding 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 could be canceled or substantially revised, and public statements by officials might 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 Wash’s article “The Federal Reserve Needs New Thinking,” calling for reforms to address flaws in recent policy execution, including 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 major shifts: first, from demand-side to supply-side policy analysis; second, from a dual focus on financial stability and macro management back to core price stability; third, from high transparency to lower predictability in communication. The approach emphasizes flexible interest rate policies combined with supply-side capacity expansion, while managing inflation risks via balance sheet adjustments—forming a policy mix of wide interest rates and tight balance sheets. The validity of this framework depends on two factors: whether AI can substantially boost productivity, and whether such gains in a loose monetary environment do not trigger inflation. If these do not meet expectations, markets may face rising term premiums and secondary inflation pressures.

The precious metals market experienced a sharp decline on January 30. We interpret this as related to prior gains, profit-taking, institutional long liquidation, and algorithmic trading effects. From the “Wash effect” perspective, concerns include: (1) Wash’s rejection of debt monetization and his push for balance sheet reduction. Significant Fed shrinkage could favor dollar credit, boosting the dollar index and breaking key support levels for precious metals (expecting currency depreciation). (2) Although Wash believes new technologies can eliminate inflation, this is a long-term narrative; he remains hawkish on actual inflation, and markets worry that if short-term inflation spirals out of control, he would respond with resolute tightening. The unexpectedly high US PPI data on January 30 amplified these fears.

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