Wall Street focuses on Waller: How can "rate cuts + balance sheet reduction" be achieved simultaneously? "Mentor" Druckenmiller: He may not necessarily be a hawk.
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Trump's nomination of Walsh to head the Federal Reserve has triggered a repricing of market expectations regarding policy direction. The nominee, a former Fed governor, has long advocated for a sharp reduction of the central bank's balance sheet—a stance that potentially conflicts with Trump's repeated calls to lower long-term borrowing costs, prompting investors to assess how this policy tension will affect the bond market.
On Friday, long-term Treasury yields rose, and the 30-year/2-year Treasury yield spread widened to 1.35 percentage points, nearing the highest level since 2021. Major asset managers believe this market volatility reflects traders digesting Walsh’s recent statements: he has criticized the Fed’s large-scale bond purchases during the 2008 financial crisis and the 2020 pandemic.
Greg Peters, co-chief investment officer of PGIM Fixed Income, said, “You have a person opposed to balance sheet expansion in a backdrop where lower rates are desired. That’s a tension point, and that’s the market’s focus, and that’s why the yield curve is steepening.”
However, billionaire investor and Walsh’s long-term mentor Stanley Druckenmiller told the media on Friday that this policymaker is not a permanent "hawk." "I have seen him go both ways on monetary policy," Druckenmiller said, adding that Walsh holds a "very open" attitude towards former Fed Chair Alan Greenspan’s policy path. "Now, Walsh firmly believes you can achieve growth without triggering inflation."
Balance Sheet Policy Becomes Core Concern
Walsh served as a Fed governor from 2006 to 2011, and has since become a notable critic of some central bank policies, particularly multiple rounds of quantitative easing that brought the Fed’s holdings of US Treasuries and other assets to nearly $9 trillion at peak.
He argues that the continued existence of a huge balance sheet will distort asset prices and may risk entrenching inflationary pressures, though he also believes the US economy faces downside risks and needs lower policy rates. In a widely watched speech in April, Walsh stated:
“Since 2008, the Fed has been the most important buyer of US Treasuries—and other debt backed by the US government,” adding, “this represents the Fed’s acknowledgment of the economy’s growing needs.”
The Fed ended its quantitative tightening program to shrink the balance sheet late last year due to concerns over shrinking short-term funding market liquidity, which in turn somewhat eased concerns over demand for sovereign debt issuance. Analysts predict the central bank’s bond purchases will expand.
Mark Dowding, head of active fixed income at RBC BlueBay Asset Management, said:
“The problem is, if you try to justify rate cuts by shrinking the balance sheet, this does nothing to lower long-term rates or improve mortgage affordability—precisely what Trump wants.”
Mentor’s Endorsement: Not a Permanent Hawk
Druckenmiller endorses Walsh’s policy flexibility, attempting to correct perceptions of him as a “permanent hawk.” The billionaire investor said in an interview Friday:
"It is incorrect to characterize Walsh as always being a hawk."
Walsh earned his hawkish reputation mainly during his tenure as Fed governor from 2006 to 2011. Meeting records from the most turbulent period of the 2008 financial crisis show that he was still reiterating inflation concerns just days before US investment bank Lehman Brothers collapsed.
But Druckenmiller points out that, despite initial skepticism, Walsh ultimately “fully supported” rate cuts during the financial crisis, and also backed rate cuts at the start of the pandemic. In 2018, the two co-authored an op-ed explaining why the Fed should not hike rates immediately, though the central bank eventually did so. Druckenmiller said the Fed was later forced to reverse its decision because “the market crashed.”
Druckenmiller believes that if Walsh is confirmed by the Senate, one of his biggest challenges will be balancing economic growth fueled by artificial intelligence with the risk of not triggering further inflation. As a Stanford University researcher, Walsh’s ties and proximity to Silicon Valley allow him to deeply understand the potential and risks of this technology. Druckenmiller added that Walsh’s "tech network" will be especially useful.
“I can’t think of anyone on earth more capable for this role,” Druckenmiller said. Since leaving the Fed, Walsh has served as a partner at Druckenmiller’s family office, Duquesne Capital Management.
Policy Coordination in Question
DoubleLine portfolio manager Bill Campbell noted that Walsh would face contradictions if, amid growing government debt and persistent inflation, he advocates for both lower short-term rates and reducing the Fed’s balance sheet. “You cannot meaningfully cut rates and shrink the balance sheet until you bring fiscal and inflation under control,” he said, adding, “I believe Walsh understands this completely.”
Druckenmiller is also a long-time mentor of US Treasury Secretary Bessant. He first hired Bessant over 30 years ago to work at Soros Fund Management, and the current Treasury Secretary later founded the hedge fund Key Square Capital with Druckenmiller’s funding. Bessant also believes that the productivity boom driven by AI will allow the Fed to cut rates without triggering inflation.
Reports indicate Bessant and Walsh got to know each other largely through their mutual relationship with Druckenmiller. Now, with Walsh nominated as Fed chair, the investor has joined the ranks of Wall Street’s most influential economic thinkers. His worldview is shaping the way Bessant and Walsh approach economic policy.
Although Druckenmiller has supported other Republicans, he has not donated to Trump’s recent presidential campaign and once described the then-candidate as "bombastic." Nevertheless, he now has direct contacts with the administration’s most important economic policymakers. “I’m very excited about the collaboration between him and Bessant,” he said, “Coordination between the Treasury Secretary and the Fed Chair is the ideal situation.”
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