China Galaxy Securities: The Federal Reserve led by Powell may usher in a profound transformation of the central bank's role.

China Galaxy Securities released a research report stating that on January 30th, Trump nominated former Fed director Kevin Warsh as the next Fed chairman, pending approval from the Senate. The firm believes that changing leadership at the Fed should not automatically be equated with a major turning point in market trends. The fundamental impact of its policies on the U.S. economy is the cornerstone of dollar pricing. A Fed led by Warsh may initiate a profound transformation in its role from providing support to the market post-financial crisis to a more traditional, rule-based "institutional anchor." The dollar is expected to strengthen in the short term and enter a long-term "slow bear" trend; short-term bond yields may rise, putting pressure on prices, but if policy credibility is maintained, long-term inflation expectations will anchor around 2%. Global stock markets may face short-term pressure, but in the long term, U.S. stocks are expected to recover first. The core logic for a bull market in gold remains solid, as central bank gold purchases will continue to increase, and any flaws in the dollar's credit will accelerate the construction of a global multi-polar reserve system. Key points from China Galaxy Securities: Why did Trump nominate Warsh: On January 30th, Trump nominated former Fed director Kevin Warsh as the next Fed chairman, pending approval from the Senate. This is not just a routine personnel change, but a signal for a dollar defense battle to protect the credit of the dollar and U.S. bonds. The market voted with its feet, as the dollar index rose by 1% that day. The nomination is currently stalled in the Senate committee stage. Warsh's monetary policy views: Warsh is a clear critic of the current Fed's approach. He has criticized both short-term policy decisions, such as sticking to quantitative tightening (QT) policies during market turmoil and raising rates at the end of 2018, as well as cutting rates by 50 basis points in September 2024. His critique also includes long-term considerations for the central bank, pointing out institutional drift and the Fed's failure to meet its statutory mandate of price stability, frequent changes in Fed indicators, including its preferred inflation measure, tarnishing the central bank's lofty position. Warsh has also questioned many aspects of how the Fed formulates and explains monetary policy, including wrongly assuming that "monetary policy has nothing to do with money." He also criticizes the disconnect between the "black box DSGE model and reality," as the Fed excessively relies on data and lacks foresight. Warsh emphasizes the credibility of monetary policy, leaning towards balance sheet reduction and normalization, while strongly disliking unlimited QE. Warsh's proposals for Fed reform: Regarding the future of the Fed, Warsh advocates for revival and revolution, preserving the core framework, correcting past policy mistakes, and focusing on reducing the balance sheet to contain inflation, which could in turn create space for lower rates. For coordination between fiscal and monetary policy, Warsh emphasizes that the Fed and the Treasury must each fulfill their respective roles. He calls for a reassessment of the 1951 Treasury-Fed Accord, where the Fed manages interest rates and the Treasury manages fiscal accounts. In terms of Fed independence, Warsh emphasizes that the Fed's expanding functions have weakened the independence of monetary policy. Impact on interest rates: From a macro perspective, changing leadership at the Fed is a good opportunity for the market to test the Fed's independence and its credibility in achieving its inflation target. If Warsh takes office and the central bank loses its independence, forcing the Fed to keep key rates below desirable levels, it could create political pressure. In terms of policy decisions, Warsh leans towards a "hawkish balancing act" and a monetary policy path of tightening and then loosening. The nature of the "Warsh dilemma" lies in pushing for significant financial regulatory reforms, such as lowering reserve requirements from an "ample reserves framework" to a "scarce reserves framework." It is believed that the Fed will gradually and cautiously lower rates, with the first rate cut likely in July, followed by observation in the first and second quarters. If inflation remains stable, a second rate cut may occur in the second half of the year or at year-end, totaling two rate cuts of 25 basis points each. Impact on asset classes: Changing leadership at the Fed should not automatically be equated with a major turning point in market trends. The fundamental impact of its policies on the U.S. economy is the cornerstone of dollar pricing. A Fed led by Warsh may initiate a profound transformation in its role, from providing support to the market post-financial crisis to a more traditional, rule-based "institutional anchor." The dollar is expected to strengthen in the short term and enter a long-term "slow bear" trend; short-term bond yields may rise, putting pressure on prices, but if policy credibility is maintained, long-term inflation expectations will anchor around 2%. Global stock markets may face short-term pressure, but in the long term, U.S. stocks are expected to recover first. The core logic for a bull market in gold remains solid, as central bank gold purchases will continue to increase, and any flaws in the dollar's credit will accelerate the construction of a global multi-polar reserve system. Risk warnings: Uncertainty in overseas rate cuts; uncertainty in Trump's new policies; geopolitical disturbances; market sentiment instability; domestic policy implementation falling short of expectations.