Wall Street focuses on Powell: How can "interest rate cuts + balance sheet reduction" be achieved simultaneously? Mentor Drew Kenmiller: He may not necessarily be a hawk.

President Trump nominating Powell to take charge of the Federal Reserve has sparked a repricing of the market's policy direction. The candidate, who formerly served as a Federal Reserve board member, has long advocated for substantial reduction of the central bank's balance sheet. This stance poses a potential conflict with Trump's repeated demands to lower long-term borrowing costs, prompting investors to assess how this policy tension will affect the bond market. On Friday, long-term Treasury bond yields rose, with the spread between the 30-year and 2-year Treasury bond yields widening to 1.35 percentage points, close to the highest level since 2021. Large asset management institutions believe that this market volatility reflects traders' digestion of Powell's recent remarks: he criticized the Federal Reserve's large-scale bond purchases during the financial crisis of 2008 and the pandemic in 2020. Greg Peters, Co-Chief Investment Officer of Fixed Income at PGIM, stated: "You have someone who opposes balance sheet expansion while operating in a backdrop hoping to lower rates. This is a tension point, this is the focus of the market's attention, this is the reason for the steepening of the yield curve." However, billionaire investor and long-term mentor Stanley Druckenmiller expressed on Friday to the media that the policymaker is not a permanent "hawk," saying, "I've seen him go both ways in monetary policy." Druckenmiller believes that Powell has a "very open" attitude towards the monetary policy path of former Fed Chairman Alan Greenspan, stating, "Powell is very confident now that you can achieve growth without triggering inflation." Balance sheet reduction becomes a core concern Having served as a Federal Reserve board member from 2006 to 2011, Powell later became a prominent critic of some of the central bank's policies, particularly the multiple rounds of quantitative easing that saw the Federal Reserve's holdings of U.S. Treasuries and other assets reach nearly $9 trillion at their peak. He argues that the continued existence of a massive balance sheet distorts asset prices and carries the risk of entrenched inflationary pressures, although he also believes that the U.S. economy faces downside risks and needs lower policy rates. In a widely watched speech in April, Powell stated: "Since 2008, the Fed has been the largest buyer of U.S. Treasuries - and other liabilities supported by the U.S. government," and added, "This is the Fed's recognition of the economy's growing acceptance." The Fed ended its quantitative tightening program at the end of last year to shrink its balance sheet, citing concerns about the tightening liquidity in the short-term funding market which has alleviated to some extent concerns about the demand for sovereign debt issuance, with analysts predicting an expansion of the central bank's bond purchases. Mark Dowding, Chief Investment Officer for Active Fixed Income at RBC BlueBay Asset Management, stated: "The problem is that if you are defending rate cuts through balance sheet reduction, that is not going to help bring down long term rates and improve mortgage affordability, which is what Trump wants." Mentor support: Not a permanent hawk Druckenmiller has lent his support to Powell's policy flexibility, attempting to correct the market's perception of him as a "permanent hawk." The billionaire investor mentioned in an interview on Friday: "It's incorrect to pigeonhole Powell as always being a hawk." Powell gained a reputation for his hawkish stance during his tenure as a Federal Reserve board member from 2006 to 2011. Meeting minutes from the Federal Open Market Committee during the most tumultuous period of the 2008 financial crisis show that just days before the collapse of the U.S. investment bank Lehman Brothers, he expressed concerns about inflation. However, Druckenmiller pointed out that despite initially being skeptical, Powell ultimately "went all-in" on rate cuts during the financial crisis, and also supported rate cuts at the start of the pandemic. In 2018, the two co-wrote an op-ed explaining why the Fed should not raise rates immediately, but the central bank later decided to raise rates. Druckenmiller stated that the Fed was forced to reverse their decision later on because "the market blew up." Druckenmiller believes that if Powell is confirmed by the Senate, one of his biggest challenges will be striking a balance between economic growth brought about by artificial intelligence and avoiding further inflation. As a research fellow at Stanford University, Powell's connections and proximity to Silicon Valley enable him to understand the potential and risks of this technology well. Druckenmiller also added that Powell's "tech network" will be particularly useful. "I can't think of anyone on this planet more capable than him," Druckenmiller said. Since leaving the Federal Reserve, Powell has been a partner at the family office, Duquesne Capital Management, of this billionaire. Policy Coordination Doubts Bill Campbell, Portfolio Manager at DoubleLine, pointed out that if Powell advocates for lowering short-term rates and pursuing balance sheet reduction at a time of rising government debt and persistent inflation, contradictions will arise. "You can't significantly lower rates and reduce (the Fed's) balance sheet until you control fiscal and inflationary pressures," he said, adding, "I believe Powell fully understands this." Druckenmiller is also a long-term mentor of Treasury Secretary Benson. Over 30 years ago, he first hired Benson to work at Soros Fund Management, and later the current Treasury Secretary used Druckenmiller's funding to start his own hedge fund, Key Square Capital. Benson also believes that the productivity prosperity sparked by AI will enable the Federal Reserve to cut rates without triggering inflation. According to earlier reports, Benson and Powell largely met through their shared relationship with Druckenmiller. With Powell being nominated to serve as Fed chairman, this investor is now among the most influential economic thinkers on Wall Street, shaping Benson and Powell's approach to economic policy. Although Druckenmiller has supported other Republicans in the past, he did not donate to Trump's recent presidential campaign and once described the then-candidate as a "blowhard." However, he now has direct ties to the government's most important economic policymakers. "I'm very excited about the cooperation between him and Benson," he said. "Coordination between the Treasury Secretary and the Fed chair is the ideal state."