Ouyang Xiaohong/Text

One

Gold fell, crude oil rose, bond market tightened, US stock market adjusted, US dollar rose... This is the first global market price list of the Walsh era. It seems to be testing the policy boundaries of this new Federal Reserve chairman in advance.

Do you remember the market performance on January 30th of this year? The news of Kevin Walsh being nominated as the next chairman of the Federal Reserve has spread, and international spot gold prices have fallen more than 8% from their historic high of $5600 per ounce, marking the largest single day drop since January 1980.

On May 15, 2026, Powell's term as chairman comes to an end, and the Federal Reserve enters the transition window. On that day, gold, which had been falling for four consecutive days, hit a low of about $4539 during trading. The international spot gold price fell by more than 4% this week, and the main futures contract on the New York Mercantile Exchange (COMEX) fell by nearly 3% at one point.

In the bond market, the yield of the US two-year treasury bond bond rose 2.30% to 4.08%, up 17.73% this year, higher than the Federal Reserve's target range of 3.50% -3.75% for federal funds; The yield of US 10-year treasury bond bonds rose 3.05% to 4.59%, up 8.60% this year; The yield of 30-year US treasury bond bonds rose 2.29% to 5.12%, up 6.17% this year. The short-term interest rate reassessment and interest rate cut path, the long-term interest rate reassessment of inflation, fiscal and term premiums, and the US Treasury yield curve are being repriced.

The Japanese bond market also shook. On May 15, the yield of Japan's 30-year treasury bond rose above 4%, the first time it reached this level since its issuance in 1999. At the same time, the yields of 20-year and 40-year Japanese treasury bond also rose at the same time, which may indicate that the global ultra long term bonds are undergoing a systematic revaluation.

The European bond market also surged simultaneously. On May 15, the yield of German 10-year treasury bond rose to about 3.15%, France to about 3.81%, and Italy to about 3.94%, all of which were significantly higher than the previous trading day. The UK 10-year yield once rose to about 5.153%, the highest since 2008, and the 30-year treasury bond bond yield rose to 5.822%, the highest since 1998.

On May 15th, a panic like resonance in the global bond market may suggest that long-term funds are no longer cheap.

In the view of Rajapak, the head of Americas research at Societe Generale, gold and bond markets follow the same logic. Bond yields do seem a bit out of control, and the market should pay close attention to the signals released by the bond market. The core meaning is that Walsh had previously retained the policy option of "cutting interest rates on the first day of office" in hearings and public statements, but inflationary pressures, oil price shocks, and steepening yield curves are reducing this possibility.

This is precisely the key to the problem. On January 30th, the international spot gold price experienced a sharp decline at the Walsh nomination node. In mid May, gold once again experienced a similar "shock" trend. The market is not simply selling gold, it is trading faith taxes.

The long-term logic of gold has not "gone bankrupt", but the previously overcrowded safe haven trading seems to be being "liquidated" in reverse by real interest rates, the strengthening of the US dollar, and deleveraging pressure. Gold originally benefited from fiscal runaway, geopolitical risks, and central bank gold purchase narratives, but once the market believes that Walsh will prioritize rebuilding currency credibility in the early stages rather than rushing to appease asset prices, gold may be suppressed by rising real interest rates.

Compared to the vigilance of the bond market, the US stock market has not experienced a panic style plunge, but its tolerance for valuation is decreasing. From a global index perspective, the Asia Pacific market, Europe, Africa, the Middle East market, and the Americas market have all experienced a general decline. The three major indexes of the US stock market adjusted synchronously: the Dow Jones Industrial Average closed at 49526.17 points, down 1.07%; The Nasdaq index closed at 26225 points, down 1.54%; The S&P 500 index closed at 7408.5 points, down 1.24%.

However, it is not that the market fell immediately after the arrival of Walsh, but rather that inflation, oil prices, global bond market linkage, and fiscal risks are already pushing up long-term interest rates, and Walsh may only be used by the market as a narrative carrier.

Perhaps the first price list of the Walsh era sent a signal that the old monetary policy framework was loosening and new boundaries were being tested. Although the 'Walsh shock' is not the only factor contributing to this round of interest rate hikes.

Two

Walsh has not yet chaired the first interest rate meeting, and the bond market has already used the yield curve to draw policy boundaries for him.

This boundary is not easy. Walsh has long advocated that the Federal Reserve should return to a more traditional and limited role as a central bank, reduce market distortions, and further shrink its balance sheet. He hopes to narrow the Federal Reserve's market footprint, restore monetary discipline, and rebuild market confidence in the value of the US dollar and the credibility of the Federal Reserve. But this framework has an implicit fiscal premise that the fiscal side cannot issue new bonds too quickly at the same time.

This is exactly where the problem lies. The Congressional Budget Office (CBO) Report No. 62105 depicts a more severe fiscal landscape than before. According to the CBO baseline forecast, the federal deficit for the 2026 fiscal year in the United States is estimated to be around $1.9 trillion, rising to $3.1 trillion by 2036; The proportion of federal debt held by the public to gross domestic product (GDP) will increase from approximately 101% at the end of fiscal year 2026 to 120% by 2036. This means that the US Treasury Department will still need to continue issuing large-scale bonds in the next decade.

The policy implication conveyed by the CBO report is that in order to curb the continuous rise of the debt ratio, the United States must make difficult political choices in the next decade - either increase taxes, cut spending (especially mandatory expenditures such as rapidly growing social security and health insurance), or do both. Any new policy aimed at extending tax cuts or increasing spending, without corresponding sources of income or spending cuts to offset it, will further worsen the already dire fiscal outlook.

What does this mean for Walsh? He will face a 'fiscal trap' as soon as he takes office. If long-term bond yields are allowed to rise, inflation expectations may be suppressed and the Federal Reserve's anti inflation credibility may be restored, but financial conditions will passively tighten, putting pressure on stock markets, real estate, credit bonds, and fiscal interest costs.

If Walsh is eager to appease the market and sends signals of interest rate cuts, suspension of balance sheet reduction, or even re expansion, the market may interpret it as the new chairman bowing too quickly to asset price fluctuations, or even believing that the Federal Reserve is lowering financing costs for the Treasury Department.

Walsh's first challenge can be described as neither easily rescuing the bond market nor allowing it to spiral out of control.

Some analysts believe that in the face of the CBO fiscal baseline, the Walsh framework may shift from "institutional restructuring" to an extremely dangerous stress testing mechanism. The original intention of shrinking the balance sheet was to "detoxify" the economy and reduce the illusion of long-term dependence on the central bank's balance sheet for liquidity. However, if the fiscal deficit expands rapidly at the same time, shrinking the balance sheet may turn from a "detoxifying knife" to a "bleeding knife".

However, Zhao Wei, Chief Economist of Shenwan Hongyuan Securities, believes that reducing balance sheets does not necessarily mean tightening liquidity.

When the Federal Reserve reduces buying, the market must answer a more realistic question: who will absorb the increasing supply of US bonds? In the past, it was the Federal Reserve, foreign central banks, commercial banks, pension funds, and insurance companies. Now, the answer can still be the market, but the price will be higher. A higher price means a higher rate of return.

Chinese Chief Economist Forum Chairman Lian Ping once asked: Will Walsh become a reconstructor of the Federal Reserve's credibility, or a proxy for Trump?

Perhaps, the CBO report and the Walsh framework together form a complex combination of "bad news good news": the former indicates that the fiscal situation is indeed deteriorating and the debt path is unsustainable; The latter, the market believes that the Federal Reserve may no longer unconditionally cooperate with fiscal expansion, but attempt to isolate fiscal risks through monetary discipline.

This is the reason why gold is under short-term pressure. The worse the fiscal situation, the more favorable it will be for gold in the long run. However, if fiscal risk is first priced through an increase in long-term yields, it will actually push up real interest rates and the US dollar in the short term, thereby suppressing gold.

Lian Ping stated that after taking office, Walsh will face multiple challenges such as economic stagflation, rapid growth of high debt, accumulation of financial risks, and the collapse of the Federal Reserve's credibility. Whether Walsh's monetary policy framework can ultimately be successfully implemented largely depends on his ability to handle the relevant relationships with the administrative system and within the Federal Reserve.

During the gap period before Walsh was sworn in as Federal Reserve Chairman, Powell was temporarily retained as Chairman, but two Federal Reserve officials nominated by Trump opposed this measure.

Three

The market is already trading ahead according to the "Walsh framework".

The core dilemma faced by Walsh is not the "impossible triangle" in the classical economic sense (exchange rate stability, free capital flow, independent monetary policy), but the policy tension triangle under the constraint of CBO fiscal baseline:

Shrinking balance sheets to recover reserves ? pushing up term premiums ? tightening financial conditions ? accelerating economic downturn; Cutting interest rates to lower short-term interest rates ? If long-term interest rates rise instead of falling due to rising fiscal supply and term premiums ? The yield curve becomes steeper ? Refinancing costs rise instead of falling; To combat inflation and maintain the credibility of the central bank, if oil prices, wages, and service inflation remain high, interest rate cuts will be interpreted as "turning prematurely without winning the war".

The difficulty lies in the lack of cooperation from the financial side. If the US fiscal path is healthy, Walsh can be more composed - if inflation is high, he will lean towards hawks; if growth is weak, he will cut interest rates; and if financial pressure is high, he will provide liquidity. But CBO's baseline indicates that fiscal deficits and interest payments are becoming structural pressures.

Some analysts believe that Walsh's initial choice is to be hawkish in tone, cautious in operation, and distinguish between "liquidity support" and "duration support" in terms of tools. This means that Walsh may manage short-term liquidity through tools such as overnight reverse repos and standby lending facilities, while slowing down the pace of balance sheet tightening to avoid long-term interest rates spiraling out of control.

From this day on, the core issue of global assets is no longer whether the Federal Reserve will cut interest rates, but a true or false question - is Walsh's "balance sheet reduction+interest rate cut" framework a true institutional restructuring or a credibility performance destined to be falsified by fiscal reality?

If it is the former, gold, 10-year US Treasury bonds, and technology stocks will all be re priced (downwards); If it is the latter, the market will experience more severe fluctuations than in 2025- because 'falsified reputation' is more destructive than 'non-existent reputation'. Powell's misjudgment of "temporary inflation" in 2021 took three years to fix; If Walsh encounters a framework collapse in the early stages of his tenure, the credibility reconstruction of the Federal Reserve may start from a negative starting point.

Walsh has not yet taken an oath, but the waiting market has made his first choice: to test his bottom line with the rise of the US dollar, the fall of gold, and the sale of long-term bonds.