THE LONG VIEW

Bottom Line Up Front: The potential appointment of Jay Powell's successor—interpreted as Kevin Warsh or a Warsh-aligned figure—marks a pivotal shift in U.S. monetary policy, transforming the Federal Reserve from an independent inflation guardian into a strategic instrument in the U.S.-China economic and technological rivalry, with profound implications for global financial stability, dollar hegemony, and inflation dynamics [1]. Threat Identification: The core threat is the strategic repositioning of the Federal Reserve as an active participant in U.S. geopolitical competition with China, particularly through monetary policy adjustments that prioritize long-term productivity (especially AI-driven growth) and financial system resilience over traditional inflation mandates. This includes insulating policy from tariff-induced inflation, deregulating to boost innovation, and reinforcing dollar dominance in response to RMB internationalization [1]. Probability Assessment: High likelihood within 2026–2028. With a second Trump administration underway as of 2026, the nomination and confirmation of a Fed chair aligned with Warsh’s views is probable [1]. The described policy shifts—especially deregulation, trimmed PCE adoption, and pro-innovation stances—are consistent with Trump-era economic priorities and increasing bipartisan concern over AI competitiveness. Impact Analysis: The consequences are systemic. A successful implementation could strengthen U.S. technological leadership, attract global capital via a 'high-productivity dollar,' and contain Chinese economic influence [1]. However, failure risks undermining Fed credibility, reigniting inflation if AI’s deflationary benefits lag, triggering financial instability through deregulation, and eroding global trust in U.S. institutions if central bank independence is perceived as compromised [1]. A fragmented global monetary order could accelerate, with increased currency competition and capital flow volatility. Recommended Actions: 1) Monitor Fed communications for formal adoption of trimmed PCE and shifts in forward guidance; 2) Assess U.S. AI productivity metrics (e.g., TFP growth, data center investment) as leading indicators of policy success; 3) Evaluate responses from the PBOC and BIS to potential dollar system reforms; 4) Stress-test portfolios for scenarios of U.S. financial deregulation and renewed inflation; 5) Track Fed governance changes, including staffing reductions and balance sheet normalization. Confidence Matrix: - Threat Identification: High confidence — Based on explicit policy proposals in analysis [1]. - Probability Assessment: Medium-High confidence — Dependent on political continuity and Senate confirmation. - Impact Analysis: Medium confidence — Long-term geopolitical and financial effects are complex and path-dependent. - Recommended Actions: High confidence — Prudent risk management given stated policy direction. [1] 信報財經新聞, '沃什4主張 幣策對華大棋局｜財星語｜陸挺｜聯儲局｜沃什｜特朗普｜鮑威爾｜量化寬鬆｜通脹｜AI生產力｜美元｜央行｜對華戰略【特朗普2.0系列】', YouTube, 2026.