"AI Will Tame Inflation Too"... The Future of the Fed Under Kevin Walsh [Weekend Money]

Considering New Inflation Indicators
Balance Sheet Reduction to Be 'Highly Gradual'
Likely to Follow Trump's Plan for 'Currency Swaps with Allies'

An analysis has suggested that Kevin Walsh, nominee for Chair of the United States Federal Reserve (Fed), is likely to take a passive stance on further monetary tightening.

Kevin Walsh, nominee for Chairman of the U.S. Federal Reserve (Fed). Yonhap News Agency

According to KB Securities on April 26, Walsh has repeatedly argued that artificial intelligence (AI) will stimulate the supply side and contribute to lowering inflation in the long term. This implies that if AI helps ease inflationary pressures, the Fed may not need to pursue aggressive monetary tightening.

In particular, Walsh stated that he would consider introducing new indicators in addition to the current Personal Consumption Expenditures (PCE) index used by the Fed, such as a method that surveys one billion prices or trimmed mean inflation. He is expected to remain as passive as possible on monetary tightening, seeking indicators that can confirm the disinflationary effects of AI.

Regarding the Fed's balance sheet reduction (quantitative tightening, QT), he suggested a cautious and gradual approach. Walsh remarked, "The expansion of the balance sheet has led to greater political engagement for the Fed and complacency among market participants," but added, "Since it took 18 years for this problem to develop, it cannot be resolved in 18 minutes." Accordingly, the Fed is likely to opt for reducing reinvestment of maturing Treasury securities or lowering the asset-to-GDP ratio, rather than directly selling its holdings. There is also a possibility that policies such as easing bank capital regulations or promoting stablecoins may be implemented in parallel to offset reduced demand for Treasuries.

The potential political use of currency swaps is also noteworthy. Walsh indicated that in areas affecting international finance, there is no need for a strong emphasis on Fed independence and signaled a willingness to cooperate with the administration's requests. In fact, U.S. President Donald Trump recently stated that he is considering providing currency swap lines to Middle Eastern allies that suffered damage from Iran's recent attacks.

Kim Il-hyuk, a researcher at KB Securities, analyzed, "The final authority to establish currency swap lines rests with the Fed, but President Trump is expected to use this tool more actively under the Walsh regime."

This content was produced with the assistance of AI translation services.