US Fed policy under new chair Kevin Warsh: What to expect

Added: 2026-05-26

[00:00:00]Kevin Walsh has been sworn in as the US Federal Reserve Chairman over the weekend stepping into the Central Bank role. The US President handpicked Walsh as the next Fed Chair with an eye on cutting key US interest rates to boost growth. Although that may be tricky with rising fuel prices and inflation pressures amid hostilities with Iran. So what will it take to steer US fiscal policy on a even keel towards stability not only for the United States, but also for the world markets and other major economies. What could be the changes coming to the Fed? Let's loop in our panelists from China and the US and discuss those questions.

[00:00:43]Joining us in Shanghai Hou Jie, Professor of Practice at the Shanghai Advanced Institute of Finance. Good to see you, sir. And also in New York Anthony Chan, former JP Morgan Chase Chief Economist. Good to see you. Last but not least in Henderson William Lee, Chief Economist and Managing Director of Global Economic Advisors. Gentlemen, what a pleasure to have you. New start apparently. The Fed Chair uh finally has got sworn in. Mr. Walsh, what is the immediate expectation with this change? To you, Mr. Lee, first.

[00:01:17]Well, for me I think Chair Walsh represents a reform a reform of the Federal Reserve System a way of thinking a new economic framework. I know a lot of discussions focused on interest rates and what he might do and whether or not he's going to be listening to President Trump. But for me and I think for financial markets in general the big change is is what uh Chairman Walsh talks about in in and in Chinese terms we really have to look to look for the truth in facts. And I think Chair Walsh is coming in the same way.

[00:01:47]The Fed has been constrained by dogma by frameworks by forward guidance uh by the use of old economic variables that that no longer reflect economic reality. And he said we have to change our way of doing things. We're not doing a good job." And I think uh that's the expectation that he comes in with.

[00:02:04]>> that uh Bill is right. Uh we we're going to bring in uh somebody like uh Kevin Warsh. He has new ideas. He He doesn't like it when the Federal Reserve talks about what they're likely to do. He feels it constrains them.

[00:02:18]Uh he talks about uh inflation. He doesn't think it's measured correctly.

[00:02:22]So, he wants to use things like trim mean inflation rates, which by the way are much lower than the existing uh inflation numbers right now. So, that's convenient because if you want uh to lower interest rates, uh you want to use an inflation measure that's lower.

[00:02:37]>> Both Mr. Chen and Mr. D are in the United States, but Mr. Hu, I know you're observing from afar from here in China.

[00:02:44]Though earlier you also work uh for the local uh reserves, if I understand. So, tell me more about your thoughts. Uh how is the change of person or personality, you think, likely to have an impact on the rest of the world? Well, certainly Mr. Kevin Warsh's personality is quite different from Powell.

[00:03:05]Uh but that is that is not the major point we're concerned about.

[00:03:08]Uh the key idea I think we're watching at is that uh he probably is going to shift so-called shift to the paradigm of his strategy. Uh that is that is to say that cuz Fed has two tools to control money supply. One is to expand or shrink its own balance sheet, and the other is to lower or raise the interest rate. By combination of these two tools, and Fed is going to achieve the um mission, uh which is control the inflation level. I think he uh is going to change the paradigm of previous um three pre- three presidents, which means he's going to use less of the balance sheet expansion or shrink uh or contraction. Instead, he's going to rely on more on the price level control, which is the interest rate.

[00:03:59]That's going to cause a lot of differences, um, is especially the financial institutions are going to see a lot of negative results because of this impact. But overall, the mission of the Federal Reserve's ultimate mission is still going to hold. Mhm. Well, there's certainly a lot of talks about what might be changing. I mean, for those stockholders around the world, they're watching their portfolio and trying to figure out, mhm, how much impact will it have on me, so to speak.

[00:04:30]Uh, so, Mr. Mr. Chen, your thoughts.

[00:04:33]Well, I think that it will have, uh, an impact out there. For example, if you contract, uh, the balance sheet, uh, you sell long-term treasuries, which he believes you should because this he believes that the Federal Reserve, uh, has a distortionary impact on the markets. That will boost, uh, long-term rates. Obviously, he's going to offset that, uh, by lowering short-term interest rates, or at least he's talked about it about this.

[00:05:01]Uh, when you have that, then that could cause the US dollar to be a little bit stronger. So, when you look around the world, um, maybe some of those, uh, countries out there, some of the APEC countries that have a lot of dollar-denominated debt, now all of a sudden, they have a little bit more, uh, challenges, uh, trying to service their debt. So, it could have implications, uh, for the, uh, for the US dollar, uh, if you move, uh, in this, uh, in this direction. So, there are many, many, uh, ways that we can, uh, take, uh, some of the, uh, things that, uh, Kevin wants to do, but I think if you focus on the US dollar, it may end up, uh, causing the US dollar to be a little bit stronger, even though the administration and most administrations always say they want a stronger dollar.

[00:05:47]Our president has actually said maybe a weaker dollar is not such a bad thing.

[00:05:51]But again, if you if you push long-term interest rates, that may end up strengthening the dollar. Mr. Hu, of course, when it comes to the dollar thing, I have to knock on your door and ask for your advice on how is likely to impact the for economies like China, which is having or Japan or several others are still holding huge uh US uh uh Treasury. Uh certainly when when the two countries have international trade with each other a lot, then the exchange rate is certainly one of the big issues to be concerned about. And uh currently, given the situation in the in the US, the likelihood of lower interest rates seems fading um if especially if the Iran situation does not alleviate very soon, then and we're even talking about uh the possibility of raising the interest rates. So, in that case, yes, I agree with Anthony that likely the uh US dollar is going to get stronger. And um then in that case, the there's a pressure for the RMB to depreciate, which is uh somehow it's a good thing for the exports, but it's not necessarily a good thing in the long run.

[00:07:03]Uh overall, if you look at the everything together. So, we we still need to watch. Mr. Lee, your thought on same question. I I think one of the things that you have to remember is that in it's in the interest of everyone who holds US dollar to have a stable and strong US economy uh because that's uh guarantees that the value of what you hold stays valuable. Uh and so, for the dollar reserves that China holds, uh if the US is able to stabilize its inflation, it stabilizes growth, uh and have a more predictable monetary policy, that's the one thing that absolutely as a China as as a reserve holder, you really want. If you are also a an emerging market economy and you're issuing uh debt in US dollars. There again, you you want to have a very stable exchange rate between your currency and the US dollar, and that again requires the US to have controlled inflation, controlled growth, uh and and and a predictable monetary policy. Now, one of the things that I said earlier was that Kevin Warsh wants to remove itself and remove the Fed from the binds and constraints of old dogma. The biggest old dogma he wants to get rid of is what they call forward guidance. the dot plot. At the end of every other uh FOMC meeting, the the Federal Reserve issues a projection of what all of its members think the interest rates will be over the next several years. And that and they put little dots to represent where those interest rates are. That's called the dot plot. And and and once that's issued, markets tend to believe that is a forecast and and a and a promise on the part of the FOMC, this is what we will do. Even though the Fed the Federal Reserve chairman at every press conference says, "This is not a commitment. This is just a forecast.

[00:08:45]This is where we think things might be, but not we don't promise it will be."

[00:08:49]But nobody believes that. So, Kevin Warsh says, "Because everyone is not believing us in our press conference, let's get rid of it, because it's distorting decisions. It's making decisions go badly." And then I think that's one of the biggest changes that should come about, uh getting getting rid of that old dogma uh and and and allowing the markets to do its own forecast.

[00:09:13]As we said earlier, a diversification of so many different things, a multipolarized world, so to speak. So, how the dollar will be going, and what is the job description of a Fed chair vis-à-vis where dollar will be, and the situations related to dollar, it's crucial. So, uh Jay, your thoughts on the comments made by your two colleagues and your thoughts on the dollar.

[00:09:40]My view is this for the Fed. I think it's essential mission is not on the dollars exchange rate relative to other currencies. The major mission is still inflation. If it has still has some extra energy then it's going to take care of the unemployment rate. So inflation inflation inflation and that is the key goal of the Federal Reserve system. So as Kevin Warsh comes to the chairmanship, I think the major concern so far is the whether he is going to be able to handle the situation so that the current uncertain situation about inflation can be controlled. So if he can successfully handle this issue then the exchange rate of the dollar will come naturally. So dollar is going to stay strong as far as I I can see if if the inflation rate uh mission can be accomplished especially within this year cuz obviously it's very challenging now given the war going on in back in Iran.

[00:10:52]So Anthony, about inflation, how many tools do you think the Fed chair has right now that might work given the agenda of the rest of this year. There's a political election in your country and there's another war which has not wrapped up yet.

[00:11:11]Right now inflation is above the target.

[00:11:14]Doesn't matter which inflation rate you use whether you use the preferred inflation rate that the that Kevin Warsh wants which is the trim mean and again what is the trim mean? The trim means that you take all those inflation components if they're rising too much you throw them out. If they're dropping too much, you throw them out. But even the the Federal Reserve in Dallas has said that because of tariffs, you have you tend to have more that are rising too much. And so when you throw those out, you get a a number that may be distorted to the downside that the actual underlying inflation rate is much higher. Now, at one point, Kevin Warsh was quoted as saying, "I would like a better inflation number. I'd like as many as 1 billion uh prices to be measured." Of course, that's a dream because the the Bureau of Labor Statistics doesn't have the luxury. In fact, their budgets have been cut over the years. They don't have the luxury of of measuring billions of dollar billions of components. The closest thing that I I see in terms of measuring a lot is a an inflation rate that is computed is called trueflation, and they measure millions of of inflation components, and they do it through the internet. They do it continuously.

[00:12:32]But even that inflation rate, yes, it's a little bit lower, but again, it's you really don't look at these I don't look at them as to whether they're lower or higher. I look at the trend. Is it where is it relative to where it was a couple of years ago? That's the real measure of where inflation is going, not the actual number because again, if you measure them and you and you give different weights to the components, you're going to get a different number. That's right.

[00:12:55]There's new court rules that's likely to change the overall picture of tariff that the US has with the rest of the world. Do you see that is going to have the impact the impact of policies by the new Fed chair? Tariffs have a one-time-only impact on the inflation rate. If you impose a tariff of 10%, you can't do the IEEPA tariffs cuz those were outlawed by the Supreme Court, but you have the other guys. You got section 122.

[00:13:25]You can you got a whole bunch of them.

[00:13:26]But, once they're in poles, if you impose a 10% or 20%, that raises prices, but it doesn't raise them every single year. At some point, they drop off.

[00:13:36]Uh of course, you also have some spillover effects. So, this is not something that the Federal Reserve can say, "Oh, you imposed a 10% tariff, so we're now going to change monetary policy." They just assume it has a one-time impact. A year later, it'll fall out from the inflation numbers. It doesn't have an impact. Now, you have something else that we haven't talked about, and that is the impact of the Strait of Hormuz being closed and what the impact will be on inflation. That is a little bit more lasting because if you raise prices on oil, then guess what?

[00:14:09]It's not like raising tariff on toys. If you don't want to buy toys, you don't buy toys.

[00:14:14]But, if you raise the price of oil, then it starts to impact the price of food because fertilizer can't get through, the price of food because you got to deliver the food. So, again, the spillover is much greater. Much greater than tariffs. To you, Jia, also your thoughts on that, the US inflation and what the Fed chair can do.

[00:14:35]Can he?

[00:14:36]Oh, uh certainly, whether he can or not, he has to do something about the inflation cuz that's the job, right?

[00:14:42]But, obviously, the the job becomes more difficult now because um earlier last year was the tariff problem, which is a one-time shot, but the the repercussion is still there and also it could change the expectation of the consumers and the producers, which is going to uh uh uh generate the so-called vicious cycle.

[00:15:07]And unfortunately, um tariff issue has somehow quieted down a little bit. But, now the major issue, of course, as we talk about is the Hormuz Strait, and the impact there is still very uncertain.

[00:15:21]Obviously, it's it's going to be big, but how long it's going to last is a question. So, if firm straight situation persists as severe as it is now, and the impact on the price levels is going to be very serious. And that's going to generate continuous effects, including expectation change. So, it's not going to be it's not going to be some issue to be taken lightly. And that is why I think Mr. Kevin Warsh is facing a tough tough job or tough start of his job. And of course, innovation is another thing. We see so much money being thrown into artificial intelligence, of course, over the past few years. So, Willem, how do you see the enthusiasm for artificial intelligence for pouring tremendous amount of money into this direction of innovation?

[00:16:18]Some argue it's likely to cool down because policy by the Fed is going to change. What's your thought?

[00:16:26]Actually, you know, the Fed policy will actually encourage more of the investment in AI and these advanced technologies, but encourage it in a in a good way because they will not issue bonds to finance the AI investment.

[00:16:39]They'll issue stock. And the reason why is that's a great way to do it is because stock means that stock holders and stock issue, you know, people who buy stock are are willing to take higher risk. If the investment doesn't pay off, they lose money, and that's it. But if but if interest rates are are high and it's financed through bonds and it's financed through the banking system, then you might jeopardize the safety and soundness of banks and the bond market, and that's where the Federal Reserve will be concerned. So, I think for the Federal Reserve, as far as the Federal Reserve is concerned, the good thing about AI is the disinflationary trend that I talked about, be able to produce more stuff with a lower cost, and that is a is a good thing it to offset any kind of price level jumps, but the the overall impact on monetary policy is AI will make it easier to lower interest rates, and that's exactly the kind of policy Chair Walsh is trying to put in place. Yes, Anthony, your thoughts on this?

[00:17:34]Well, I I'm a big supporter of increased productivity because if you get increased productivity as Bill said, you're going to have deflationary pressures, but I'm not completely convinced that we're seeing that yet because if you look at the quarter of a quarter changes in US and non-farm productivity on an annualized basis over the last two quarters, it actually has been slowing down, not accelerating. But again, Kevin Walsh tells us you got to be a little bit patient, it's going to get much better, and if it does, everybody wins. The Federal Reserve wins cuz you get the lower inflation, the workers win because with lower inflation, their real wages are higher, but the problem is in the last employment report, for the first time in a long time, real wages did not increase, they were basically flat. So, we're not seeing that yet, but our hope and expectation is that we will at some point, but right now, I don't think we've seen it yet. Jia two things. One, it's comment on the question your colleagues already talked about, and secondly, how is China with also tremendous amount of input into AI plus looking at the picture in the United States and looking at the new Fed chair, the policies impact on the future investment trends?

[00:18:50]I think it it is right. AI is going to raise the productivity, and in the long run, it's likely to help the inflation rate to come down. In the short run, probably we're going to see more unemployment problem rather than the inflation control effect. So, yes, we have to look at both issues cuz unemployment rate is also something the Fed is concerned about. So, but we still need wait. I don't think the waiting time will be too long though cuz we are seeing that AI is advancing very rapidly almost on a daily basis. Back to the issue of China's investment on AI, of course, both the government and the investors and producers in the economy are very excited about this prospect. China is probably together with United States the best countries in the world in terms of AI development. So, we we are putting a lot of money in this sector and we're going to see a lot of applications in China booming. And I think in terms of application of any technology, China is probably the best in the world. And so, sometime I say you US is good at innovation, but China is good at application.

[00:20:08]All right. Well, we want to thank the three of you for joining us on this discussion. Really appreciate it.

[00:20:13]Anthony Chan, William Lee, last but not least, the Hu Jie. Appreciate you, gentlemen.