Strange phenomenon: Trump repeatedly emphasizes interest rate cuts, but the new Fed chair candidates are collectively discussing "balance sheet reduction"

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Despite President Trump’s continued public pressure to lower interest rates, the top candidates for the next Federal Reserve Chair have instead focused policy discussions on limiting the size of the central bank’s balance sheet—a policy tendency that may run counter to the president’s desire for low rates.

This discourse about the Federal Reserve’s role comes as the White House is actively searching for Powell’s successor. According to POLITICO, Treasury Secretary Bessent, who is overseeing the search, as well as several key figures on the candidate list, have all publicly expressed concerns about the Fed’s vast market influence, hinting at a potentially more restrained policy path in the future.

The latest development: major candidates, including former Fed governor Kevin Warsh and current governor Michelle Bowman, have sent similar signals. On Fox Business, Warsh called in populist tones to “pull money out of Wall Street,” while Bowman advocated maintaining “the smallest balance sheet possible.” These statements stand in stark contrast to Trump’s demand to lower borrowing costs by any means.

For investors, the core of this debate is whether the Fed will continue to use quantitative easing (QE)—a powerful tool—in response to future recessions as in the past. The selection of the next chairman will directly determine the Fed’s policy toolkit and its willingness to act in the coming years, deeply influencing global capital market expectations and trajectories.

The “Hawkish” Consensus Among Candidates

In the race for the next Fed chair, a “hawkish” consensus to limit central bank market intervention appears to be forming. The candidates widely believe the Fed’s balance sheet, which exceeds $6 trillion, is overly large.

• Kevin Warsh: As a former Fed governor, Warsh has long advocated for limiting the size of the central bank over the past 15 years. He believes shrinking the balance sheet can create room for the Fed to lower short-term interest rates without sparking inflation, though not everyone agrees with this view.
• Michelle Bowman: As a current Fed governor, Bowman reasons that a smaller balance sheet provides “more space to respond to future shocks or recessions,” and avoids concerns about lack of room for expansionary tools.
• Bessent: Treasury Secretary Bessent, who is leading the selection process and has been mentioned by Trump as a possible candidate, evidently said in a 5,000-word article that the central bank needs to “reduce its distortionary impact on markets.” Though he clarified in interviews that his view is more about future asset purchases being cautious rather than immediate tightening, he admitted “reform” is one of his priorities in the selection process.

Trump’s Contradictory Position

The candidates’ focus on “balance sheet reduction” directly conflicts with Trump’s policy preferences and previous remarks. Known for his “improvisational policy style,” Trump’s chief concern is lowering interest rates to alleviate federal debt costs and stimulate mortgage lending.

A compelling example occurred in December 2018. At the time, the Fed was shrinking its asset holdings by up to $50 billion per month, and Trump tweeted cryptically: “Stop with the 50 B’s,” expressing concern that this would drain liquidity from key funding markets.

This raises a core question: Does Trump want to weaken the Fed’s market influence to reflect traditional Republican small-government philosophy; or does he wish to use this influence to achieve ultra-low interest rates? So far, the answer remains unclear.

The Policy Logic Behind “Balance Sheet Reduction”

The candidates’ call to shrink the Fed’s balance sheet stems from longstanding Republican concerns about quantitative easing. QE is an unconventional tool by which the central bank buys US Treasuries and mortgage-backed securities to lower long-term interest rates after short-term rates hit zero.

Opponents argue this policy has several drawbacks:

1. Disrupting Market Discipline: Injecting massive cash into the financial system distorts normal market pricing and risk-clearing functions.
2. Encouraging Government Spending: Bessent pointed out in his article that the Fed’s asset purchases created room for Congress to enact large-scale fiscal spending after the pandemic.
3. Exacerbating Wealth Inequality: By artificially boosting asset prices, QE is accused of worsening the wealth gap.

Of course, not everyone agrees. Current Chair Powell last month defended QE, saying it was a “key tool” amid market breakdowns and surging unemployment in 2020, though he admitted in hindsight the 2021 asset purchases may have lasted too long.

Market Outlook and the Final Decision

No matter how this debate unfolds, the market’s short-term path seems set. The Fed plans to stop reducing its balance sheet on December 1 to avoid liquidity shortages in the financial system. The decision is supported by White House chief economist—and current Fed governor—Stephen Miran. Miran also noted that, as the central bank gradually replaces its mortgage-backed securities holdings with short-term Treasuries, markets remain exposed to greater long-term debt risks.

Looking ahead, Miran said when the Fed’s dual mission of employment and price stability faces “credible and major risks,” he does not object to using QE.

Ultimately, no matter who takes over the Fed after Powell’s term ends next May, they may well face the reality that “there are no atheists in the trenches.” If the US truly slips into recession and cost of living becomes the overriding public concern, any Trump appointee may find it necessary to utilize all available policy tools. But before that, this debate over the Fed’s future role will continue to inject uncertainty into the market.

Risk Warning and DisclaimerMarkets are risky, investments require caution. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situation, or needs. Users should assess whether any opinions or conclusions herein suit their own circumstances. Investing accordingly is at their own risk. ```