Trump nominates Powell as Federal Reserve Chair. What does this mean for Bitcoin?

Trump nominates Walsh to be Federal Reserve Chair, with market expectations leaning toward more aggressive rate cuts and balance sheet reduction. However, interbank liquidity has shifted from excess to tightness, and forcibly shrinking the balance sheet could trigger a crisis; interest rate cuts need to balance relations with Trump, and with the unemployment rate not falling below 4.5%, support remains difficult. Walsh advocates “trend dependence” rather than “data dependence,” and a lack of flexibility in the policy framework could amplify market volatility.

The space for balance sheet reduction has been exhausted, and liquidity is tight and has become a hard constraint

There is considerable discussion in the market about the three fires of Federal Reserve Chairman Walsh’s new appointment, with more rate cuts and balance sheet reductions seeming to be the consensus. But the reality is that there are no objective conditions in the US money market for more and faster balance sheet reduction. After Q4 2025, the usage of ONRRP (Overnight Reverse Repurchase Facility) has basically fallen to zero, the SOFR-ONRRP spread has risen to a record high of 25 basis points, and the SRF (Standing Repo Facility) usage remains above zero.

All these signals indicate that liquidity in the US interbank market has shifted from being abundant to just above ample—becoming a tight constraint. Dealer banks, hedge funds, and other overnight funding demanders are already experiencing financing difficulties and high costs. This is why the Fed restarted the Technical Balance Sheet Expansion (RMP) in December last year.

In this context, haphazardly stopping RMP and resuming balance sheet reduction would, on one hand, reignite liquidity crises in the repo market and cause SOFR to spike, and on the other hand, lead to a sharp increase in SRF usage. The key point is that when dealer banks use SRF, the Fed is passively expanding its balance sheet. In other words, in the current environment, forcing a reduction in the balance sheet will have no substantial effect other than causing liquidity issues in the repo market.

For the US interbank market to continue shrinking its balance sheet or even return to a “scarce reserve” framework, the existing banking regulatory framework must be fundamentally rewritten. This includes, but is not limited to, Basel III (liquidity coverage ratio), the Dodd-Frank Act (stress testing, RLAP), and the internal self-regulatory constraints (LoLCR) developed within banks over the past 20 years. These issues are beyond the authority of the Fed chair alone; Dodd-Frank requires legislative amendments, and internal bank regulations need to be gradually adjusted by the major banks.

Walsh’s authority regarding balance sheet reduction policies

· The only actions possible are persuading the FOMC to reduce monthly RMP purchases

· Or pausing RMP when the TGA (Treasury General Account) declines and reserves recover rapidly

· But only if no liquidity crisis occurs in the repo market

· RMP is a policy approved by a full FOMC vote, so significant rewriting is unlikely

What might influence policy is the arrival of the next recession or crisis. If the Fed has already lowered rates to the zero lower bound (ZLB), but liquidity pressures remain severe and economic recovery prospects are poor, Chair Walsh might prefer to end QE earlier or reduce it more aggressively, or start QT sooner. But this depends heavily on the severity of the crisis and Walsh’s own mindset; the perspectives of current officials and observers differ greatly, and whether he is pragmatic enough is uncertain.

High thresholds for rate cuts need to balance relations with Trump

Walsh is also unlikely to significantly alter the current outlook for interest rate policy. First, the threshold for Walsh to turn hawkish is high. Currently, the US labor market remains in a “frozen” state with no employment growth or layoffs, and inflation data is slowly approaching 2%. Additionally, he will likely still need to show gratitude toward Trump, making a clear hawkish shift unlikely before 2026.

Second, the threshold for a substantial dovish shift—such as cutting rates more than three times if growth and inflation data remain unchanged—is also high. On one hand, interest rates are near the neutral level, and the Fed can afford to “wait and see” without rushing to cut. On the other hand, the unemployment rate is the most critical indicator for the FOMC in 2026. Past economic projections (SEPs) show that the FOMC’s unemployment forecast for 2026 has consistently been around 4.4-4.5%, indicating that unemployment will be a “soft target.”

If unemployment in Q4 2026 does not significantly exceed 4.5%, it is unlikely that other voters will support a large rate cut. Historically, any new Fed chair who is perceived as too close to the president faces strict scrutiny from other voting members, and any “stupid” move could garner widespread opposition. An example is G. William Miller, the shortest-serving Fed chair in 1978-1979, who was an ally of President Carter and refused to raise rates amid high inflation, ultimately being pushed out by Carter through covert and overt means.

There are two scenarios in which Walsh might unexpectedly cut rates sharply: one, if recession risks increase significantly or stock markets crash; two, if inflation drops sharply in 2026. The former seems unlikely now, but if Trump cancels tariffs in the second half of the year (to boost midterm election prospects), the temporary decline in commodity CPI could give Walsh a brief window to cut rates (an excuse).

This passive policy space underscores Walsh’s dilemma: he must balance maintaining the Fed’s independence with his relationship with President Trump, who nominated him. Excessive cooperation with Trump’s interest rate cut demands could provoke opposition from other FOMC members and market doubts about independence; sticking to a hawkish stance might lead to conflicts with the Trump administration. This dilemma makes significant moves in 2026 unlikely.

Lack of flexibility in the policy framework may amplify market volatility

Even more concerning is that Walsh’s policy philosophy may lack flexibility and pragmatism. He has repeatedly expressed opposition to data dependence and forward guidance, emphasizing “trend dependence” over “data dependence.” He believes the Fed should only adjust policy when deviations from employment and inflation targets are “obvious and significant,” rather than responding to monthly reports (like employment data), which are noisy and subject to revision.

He advocates prioritizing medium- and long-term economic trends over immediate data points, basing policy decisions on judgments about future economic cycles rather than recent data. This approach sharply contrasts with Powell’s. Powell is known for his flexibility and pragmatic responses, such as shifting after the 2018 market crash, unprecedented interventions in March 2020, the temporary 75bps rate hike during the June 2022 blackout period, and a one-time 50bps rate cut in September 2024 driven by employment data.

If Walsh’s policy philosophy truly aligns with his previous statements, his approach will become more “rigid” and “subjective.” The problem is that economic cycle judgments are inherently uncertain; over-reliance on trend assessments and ignoring real-time data could cause slow responses when the economy suddenly shifts.

Powell’s flexibility, though sometimes criticized as “changing policies abruptly,” has been crucial in extreme market conditions. During the COVID-19 outbreak in March 2020, Powell implemented a series of unprecedented measures within days to prevent systemic collapse. In contrast, Walsh’s insistence on “trend dependence” could lead to delayed reactions in crises.

Objectively, this policy framework could increase macroeconomic and market volatility. When market participants cannot predict when the Fed will respond to data, uncertainty rises, leading to greater market swings. This stands in contrast to Powell’s efforts to reduce volatility through clear communication and flexible responses.