Original author: Zhang Yaqi

Original source: Wall Street Journal

Waller is about to face the long-awaited confirmation hearing for the Federal Reserve Chairman. Underneath this moment lies a current of tension: he must demonstrate obedience to Trump while also maintaining the central bank's bottom line under inflationary pressure; a slight misstep could lead to him becoming the next scapegoat for accountability from the White House.

The Senate Banking Committee is scheduled to start Waller’s confirmation hearing this Tuesday. According to multiple sources cited by the Financial Times, the 56-year-old nominee has envisioned a series of reforms: from reducing the frequency of the Federal Reserve’s communication to shrinking its balance sheet, which exceeds $6.7 trillion. However, the futures market currently shows only less than a 50% probability of a 25 basis point cut this year—far from the "major" and "immediate" rate cuts that Trump has repeatedly called for on his Truth Social platform.

Derek Tang from the monetary policy analysis firm warns, "Waller's honeymoon period might be very short." This implies an awkward situation: if Waller cannot meet Trump's demand for rate cuts, he is likely to become the target of public attacks from the president, akin to his predecessor Powell—except this time, the role of "scapegoat" shifts from being called a "fool" to being accused of "betrayal."

Meanwhile, the confirmation process itself is fraught with obstacles: Republican Senator Thom Tillis has threatened to block the nomination from proceeding to a full Senate vote, and current Chairman Powell's term will expire on May 15, with Trump warning last week that he would be fired if Powell does not "timely" resign at that time.

For the market, the core uncertainty lies in: can Waller find a way between Trump's political pressure and the Federal Reserve's institutional credibility? Several former Federal Reserve officials have warned that history has precedents—during the 1970s, Federal Reserve Chairman Arthur Burns succumbed to Nixon's demands for rate cuts, ultimately leading to years of stagflation, leaving a historical conclusion of being a "scapegoat."

In other words, whether Waller chooses to comply or resist, he could become a scapegoat: compliance would repeat Burns' mistakes, taking the blame for runaway inflation; defiance could lead him to follow Powell's footsteps and become the next target of Trump's political wrath.

"Reformer" - Waller aims to shake up the Federal Reserve's "old game"

Waller has long coveted the position of Federal Reserve Chairman. Eight years ago, he lost to Powell, and after Trump’s victory, he was offered the position of Secretary of the Treasury but made it clear that leading the central bank is his true ambition.

On policy proposals, Waller's reform agenda is quite radical. He is deeply dissatisfied with the current communication system of the Federal Reserve, particularly loathing the so-called "dot plot"—a chart published quarterly that provides anonymous interest rate forecasts from 19 officials. He warned in a speech a year ago, "Once policymakers release economic forecasts, they may become prisoners of their own words."

In addition to reducing public statements, Waller also hopes to lead by example, guiding other officials to lower their media exposure frequency. Vincent Reinhart, chief economist at BNY Investments and former senior Federal Reserve official, interprets: "Waller advocates for narrowing communication on the grounds that as long as actions are consistent enough, there is no need to speak at all times. He also believes that over-communication increases the risk of over-commitment and makes the committee more susceptible to political criticism."

On the balance sheet issue, Waller wishes to compress this sheet, which has swelled to $6.7 trillion due to large-scale asset purchases during the financial crisis and the COVID-19 pandemic. According to media sources citing informed individuals, the path he envisions for balance sheet reduction would be gradual, not seeking to return to pre-2008 levels and would require substantial preliminary research. His core logic is: by tightening liquidity in the banking system, to create room for reducing short-term interest rates.

However, former Federal Reserve official Joseph Gagnon from the Peterson Institute for International Economics points out the inherent contradiction: "He told Trump that substantial rate cuts could be achieved through balance sheet policy. But I guess he didn’t tell Trump that this might actually mean higher rather than lower mortgage rates." Currently, one of the most respected economists on the Federal Reserve Board, Chris Waller, has explicitly rejected the notion of reducing the balance sheet to pre-crisis levels, calling it "inefficient" and "foolish" due to the potential for market turmoil.

Shifting stance, can he be trusted?

Waller studied under monetarism master Milton Friedman during his undergraduate years at Stanford University and claims to be deeply influenced by him. In 2006, he joined the central bank as the youngest governor in Federal Reserve history and served as a vital link between then-Chairman Ben Bernanke and Wall Street and Congress during the financial crisis. Just days before the collapse of Lehman Brothers, he had already raised warnings about inflationary pressures, representing a hawkish voice within the committee at that time.

However, during Trump’s current administration, while the president publicly denigrated Powell as a "fool" and "idiot" to pressure for rate cuts, Waller displayed a more dovish posture. He cited a modified argument from former Chairman Alan Greenspan, asserting that an AI-driven productivity boom would pave the way for substantial rate cuts—this view was questioned by several members of the FOMC.

Alan Schwartz, who worked with Waller at Bear Stearns, believes that Waller’s decisions will be based on economic data rather than White House pressure: "If the facts change, Waller will not stick to conventional wisdom. He is highly respected in the financial policy field and will strive to find the right answer." Guggenheim Partners' Schwartz added that this also means his stance might adjust with changing circumstances.

Former Reserve Bank of India Governor and University of Chicago scholar Raghuram Rajan reminds that Waller will assume office under "enormous political constraints," and potential risks in the private credit markets could require him to address financial stability issues in addition to monetary policy challenges.

Trump and Wall Street: Not easy on either side

Waller is not Trump’s first choice. According to the Financial Times, Trump has long indicated to his inner circle that he prefers to nominate National Economic Council Director Kevin Hassett. However, Hassett's candidacy sparked a strong backlash on Wall Street—concerns were raised about his absolute compliance with Trump on issues like tariffs and firing the director of the Bureau of Labor Statistics.

The turning point in the situation came when Trump ally, Washington D.C. federal prosecutor Jeanine Pirro initiated a criminal investigation against Powell. Powell immediately countered publicly, stating that the investigation was a plot to force the Federal Reserve to cut interest rates, making Wall Street clearly aware of the risk of having a "Trump loyalist" as the central bank chairman. Heavyweights in the financial sector, such as JPMorgan CEO Jamie Dimon, privately pressured Trump to choose another candidate, leading to Waller ultimately receiving the nomination.

Waller does have some connections within Trump's circle—he is the son-in-law of Republican donor and Trump University classmate Ronald Lauder, and is familiar with Treasury Secretary Mnuchin through the family office of Wall Street tycoon Stanley Druckenmiller, with Mnuchin being the key figure leading the early stage of the nomination interview process.

Senate confirmation: Republican insiders have already set up a barrier

Waller’s confirmation process faces substantial obstacles. North Carolina Republican Senator Thom Tillis has made it clear that he will block Waller’s nomination from advancing to the Senate floor until the criminal investigation against Powell is rescinded. This deadlock has raised the possibility that Powell may continue to serve beyond his term ending on May 15.

In response, Trump warned last Wednesday that Powell would be fired if he does not "timely" resign, while expressing continued support for Pirro to proceed with the investigation. Powell stated he would stay on as interim chairman until Waller secures majority support in the Senate.

Without the support of at least 51 of the 53 Republican senators, Waller's path to becoming the Federal Reserve Chairman will face failure. However, once the investigation into Powell is resolved, the mainstream judgment in political circles and political prediction markets remains that the Republican Senate will ultimately not block Waller from taking this position he has long desired.

Some observers even believe that the delay in the confirmation process may not be entirely disadvantageous for Waller. If the court issues a favorable ruling in the relevant lawsuits involving Cook and Powell, it could not only clear the way for the confirmation process but also provide institutional shelter for Waller against White House pressure. Gagnon bluntly stated:

"I believe Waller, regardless of what he has told Trump, does not want to become the next Arthur Burns, who yielded to Nixon’s will and ultimately triggered years of stagflation. If the Supreme Court protects Lisa Cook's position, Waller might also receive similar protection. At that time, he will think he can do the right thing—and what he considers the right thing may very well disappoint Trump."

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