Soochow Securities: Is the new Federal Reserve Chair Powell really hawkish?

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Source: MacroFans Philosophy

Core Viewpoints

Core Viewpoint: We believe the market’s bullish interpretation of Waller is based on a misconception. From the latest perspective, Waller has shifted to a dovish stance on monetary policy; regarding his nomination reasons, Trump would only choose a Fed chair willing to cut rates; and from the feasibility of hawkishness, the current liquidity environment does not support the Fed shrinking its balance sheet. Therefore, we expect that after Waller becomes Fed Chair, he will implement more rate cuts within the reasonable range of the Taylor rule than market expectations. In terms of pace, the Fed may start consecutive rate cuts in June, totaling 75-100 basis points for the year. At that time, short-term U.S. Treasury yields could decline sharply, while long-term yields may rise due to the term premium driven by the reversal of the “Waller trade.”

Trump nominated Waller as the next Fed Chair, and the market’s “inertia” trades hawkish expectations. On January 30, Trump announced his nomination of Kevin Waller as the next Fed Chair. During his tenure as Fed Governor from 2006 to 2011, Waller was hawkish, emphasizing inflation as a primary concern even during the peak of the 2008 financial crisis. He has consistently advocated reducing the Fed’s balance sheet, believing that its large size interferes with market mechanisms and price signals. His stance on balance sheet reduction and focus on inflation led the market to view him as hawkish, with trades based on “hawkish policy expectations + independence restoration,” causing the dollar and Treasury yields to rise, and gold and other precious metals to fall sharply. However, from the latest viewpoints, nomination reasons, and hawkish feasibility, we believe the market’s hawkish interpretation of Waller is an “inertia” mindset; after taking office, he will still be a dovish Fed Chair.

Latest Viewpoint: Waller has shifted to a dovish stance on monetary policy. Although Waller was more hawkish than other Fed Governors during his previous tenure, since 2025 he has adopted a dovish stance. Specifically, Waller believes that productivity gains from AI will not lead to inflation, and the Fed does not need to tighten monetary policy to restrain economic growth. The current bloated balance sheet was designed to address past crises and support large financial institutions; its scale can be significantly reduced. Overall, Waller sees inflation as stemming from excessive government spending and money issuance, and believes that balance sheet reduction can create policy space for further rate cuts, channeling lower rates back into households and small to medium-sized enterprises.

Nomination Reasons: Trump will only choose a Fed Chair willing to cut rates. Trump’s primary criterion for selecting a Fed Chair is whether they can quickly cut rates. If Waller cannot meet this standard, Trump has no motivation to nominate him. Additionally, Waller has strong personal ties to Trump. He is the son-in-law of Ronald Lauder, heir to the Estée Lauder family. Lauder has had over 60 years of private relations with Trump, and according to the Federal Election Commission (FEC), Lauder has donated between $6 million and $8 million to Trump’s campaign since 2016, providing significant support. This close personal connection makes Waller more likely to align with Trump on monetary policy.

Hawkish Feasibility: The current liquidity environment does not support balance sheet reduction. We believe Waller’s long-standing advocacy for balance sheet reduction mainly reflects opposition to Powell, Yellen, and even Bernanke’s era of unlimited balance sheet expansion. The lightweight “quantitative easing” (RMP) launched by the Fed in December last year was in response to the current situation where dollar liquidity faces the exhaustion of the repo “buffer,” and repo usage is increasing. Bank reserves are also beginning to face tangible impacts as balance sheet reduction proceeds. In this environment, the Fed’s use of RMP aims to prevent potential liquidity crises in the repo market. If Waller immediately initiates balance sheet reduction upon taking office, triggering a liquidity crisis similar to 2019, it would be very detrimental to subsequent policy implementation.

Future Outlook: Waller’s nomination still needs Senate approval, and the tail risk of Powell “retiring but not retiring” remains. Before officially becoming Fed Chair, Waller must be reviewed by the Senate Banking Committee and approved by a simple majority vote. Currently, the committee has 13 Republican and 11 Democratic members, with Trump holding an apparent advantage. However, some Republican members have recently expressed dissatisfaction with Trump’s interference in Fed independence; for example, Tom Tillis stated he would not approve any Fed nominations from Trump before the end of the criminal investigation into Powell. To ensure smooth approval, Waller needs to maintain an image of “independence” before succeeding Powell, whose term ends on May 15. Additionally, markets are increasingly paying attention to the possibility that Powell might remain as a Fed Governor after stepping down as Chair, continuing to influence policy (see report “Historical Lessons: How Big Is the Tail Risk of Powell Becoming the ‘Supreme Leader’ of the Fed?”). Trump also needs Waller to maintain an “independent” label before taking office to reduce the likelihood of Powell staying on as a Governor under the pretext of defending Fed independence, thereby strengthening control over monetary policy.

Market Implications: The “Waller trade” may persist until Waller’s official appointment in May, then reverse. As mentioned, Waller will maintain an “independent” appearance until officially taking office, so the current “Waller trade” may continue through February to April. The market’s true realization that Waller is “seemingly hawkish but actually dovish” may only come after his formal appointment as Fed Chair. Looking ahead, although Waller is inclined to align with Trump on monetary policy, the Fed is unlikely to revert to the 1970s scenario of “president’s orders only.” Waller’s rate cuts will still need to follow the framework of the Taylor rule (see report “Technical Post: How Does the Fed Decide to Hike or Cut Rates?”). Therefore, we believe that after taking office, Waller will lower interest rates as much as the Taylor rule permits. We expect the Fed to start consecutive rate cuts in June, totaling 75-100 basis points for the year (3-4 cuts), exceeding the market’s current expectation of two cuts. At that time, short-term Treasury yields could decline sharply, while long-term yields may rise due to the term premium driven by the trade reversal.

Risks: Waller’s appointment leads to unexpectedly hawkish monetary policy; Trump intervenes again via administrative measures; market reactions to Trump’s interference in Fed independence fall short of expectations.

This is part of the report; for the full version, please see “Is the New Fed Chair Waller Really Hawkish?”

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Editor: Ling Chen