China Galaxy Securities released a research report stating that on January 30th, former Federal Reserve Governor Kevin Warsh was nominated by Trump to be the next Fed Chair, pending Senate approval. The firm indicated that a "change in Fed leadership" should not be automatically equated with a major inflection point in market trends; how the policies affect the fundamentals of the US economy remains the cornerstone of US dollar pricing. A Federal Reserve led by Warsh could initiate a profound transformation in the central bank's role: shifting from a deeply involved "backstop" providing market support post-financial crisis towards a more traditional, rule-based, and disciplined "institutional anchor." The US dollar is expected to strengthen in the short term but exhibit a "slow bear" pattern long-term. US Treasury yields are projected to rise in the near term, putting pressure on prices; medium to long-term, if policy credibility is established, long-term inflation expectations could anchor around 2%. Global equity markets may face short-term pressure, while US stocks are expected to experience disruption before stabilization over the long run. The core logic supporting a medium to long-term bull market for gold remains solid, central bank gold purchases are anticipated to continue increasing, and any flaws in US dollar credibility could accelerate the construction of a multipolar global reserve system. The main views of China Galaxy Securities are as follows:

Why Trump Nominated Warsh: The nomination of former Fed Governor Kevin Warsh on January 30th is not merely a routine personnel change but signals a defense of the US dollar, aiming to uphold the credibility of US dollar and Treasury debt. The market reacted immediately, with the US dollar index rising 1 percent that day. The nomination is currently stalled at the Senate committee stage.

Warsh's Monetary Policy Views: Warsh is one of the clearest critics of the Fed's current path. His criticisms address both short-term policy decisions, such as persisting with quantitative tightening (QT) during market turbulence and the late-2018 rate hikes, as well as the September 2024 50-basis-point rate cut. They also encompass long-term considerations about the central bank, including institutional drift and the Fed's failure to fully meet its statutory mandate for price stability. He argues that frequent changes in the Fed's metrics, including its preferred inflation gauge, undermine the institution's stature. Warsh has also questioned many aspects of how the Fed formulates and communicates monetary policy, including the mistaken belief that "monetary policy has nothing to do with money." He criticizes the disconnection of "black box DSGE models from reality," stating the Fed over-relies on data and lacks forward-looking vision. Warsh emphasizes monetary policy credibility, favors balance sheet reduction and normalization, and strongly opposes unlimited QE.

Warsh's Proposed Fed Reforms: Regarding the Fed's future, Warsh advocates for revival through revolution—preserving the core framework while correcting past policy errors. The core focus is on reducing the balance sheet and curbing inflation, which could, in turn, create room for lowering interest rates. On fiscal and monetary coordination, Warsh stresses that the Fed and Treasury must fulfill their respective responsibilities. He calls for a re-examination of the 1951 Treasury-Fed Accord, which delineates the Fed's role in managing interest rates and the Treasury's role in managing fiscal accounts. Regarding Fed independence, Warsh emphasizes that the Fed's over-expanded functions weaken its monetary policy independence.

Impact on Interest Rates: From a macro perspective, a change in Fed leadership provides a test of the Fed's independence and the credibility of its commitment to achieving its inflation target. If Warsh assumes the role, political pressure could emerge if a loss of central bank independence forces the Fed to maintain key rates at excessively low levels. In terms of policy decisions, Warsh leans towards a "hawkish balancing act" and a "tighten first, ease later" monetary policy path. The essence of the "Warsh dilemma" involves promoting a reduction in reserve requirements and transitioning from an "ample reserves framework" to a "scarce reserves framework"—a significant financial regulatory reform. The anticipated monetary policy path involves gradual, cautious rate cuts, potentially starting with a first cut in June-July, followed by an observation period of 1-2 quarters. If inflation shows no rebound, a second cut could occur in the second half or by year-end, totaling two 25-basis-point cuts for the year.

Impact on Major Asset Classes: A "Fed leadership change" should not be automatically seen as a major market trend inflection point; the impact of policies on US economic fundamentals is key for dollar valuation. A Warsh-led Fed might initiate a deep shift in the central bank's role: from a deeply involved post-crisis "backstop" to a more traditional, rules-based "institutional anchor." The US dollar is expected to strengthen short-term but enter a "slow bear" pattern long-term. US Treasury yields may rise near-term, pressuring prices; medium to long-term, credible policy could anchor long-term inflation expectations near 2%. Global equities face short-term pressure, while US stocks may decline before recovering long-term. Gold's medium to long-term bull market thesis remains firm, central bank buying is likely to persist, and any US dollar credibility issues may hasten a multipolar reserve system.

Risk Warning: Uncertainty regarding overseas interest rate cuts; Uncertainty surrounding new Trump administration policies; Geopolitical disruption risks; Unstable market sentiment risks; Risk that domestic policy implementation effects fall short of expectations.