How does Goldman Sachs view Waller? The market always "misjudges" the new Fed Chair, and Waller's "balance sheet reduction" is difficult, while rate cuts are a prerequisite for his nomination.

After Trump nominated Waller to serve as the next Federal Reserve Chair, markets quickly bet on a more hawkish balance sheet policy, but Goldman Sachs believes the market may be misjudging.

Wallstreetcn mentioned that on January 30, Trump nominated former Fed Governor Kevin Waller as the next Fed Chair. Following the announcement, long-term bond yields rose slightly, the dollar rebounded, and precious metals plummeted. The market seems to be pricing in his “hawkish” stance on the balance sheet.

However, recently, Goldman Sachs’ trading and research teams have conducted in-depth analyses of Waller, believing that the market may once again be misjudging the actual stance of the new Fed Chair.

Goldman Sachs FX strategist Mike Cahill warned that judging Waller’s policy orientation solely based on his previous statements at the Fed is incorrect, noting:

We know that at least expressing willingness to cut rates was a prerequisite for him getting this job.

Goldman Sachs US Treasury trader BROWN stated that the steepening of the yield curve and narrowing swap spreads have been fully priced in, and Waller’s hawkish comments on the balance sheet are unlikely to translate into a restart of quantitative tightening. He said:

This would be too destructive for risk assets.

Market habitually misreads the initial stance of the new Fed Chair, and each recent predecessor has shown significant “misleading” in their first year in office. Investors are experiencing another cycle of “misjudging” the new Fed Chair, and it will take time for the market to adapt to the new communication style.

Goldman Sachs economist Mericle: Balance sheet reduction is difficult to push forward, the institutional framework has become a settled fact

Goldman Sachs economist David Mericle summarized Waller’s core policy positions.

On interest rates, Waller called for rate cuts last year, believing that the Trump administration’s deregulation and artificial intelligence are “anti-inflation” forces, and the Fed should not maintain high rates solely due to strong economic growth.

On the balance sheet issue, Waller has been a long-time critic. He opposed previous QE2, arguing that a large balance sheet distorts markets, worsens inequality, and fuels inflation. He advocates combining rate cuts with balance sheet reduction to offset their impacts on the financial environment.

Mericle pointed out that he does not believe Waller will push for a significant reduction in the balance sheet. The main resistance lies in the broad and strong support within the Fed for the current “ample reserve” operational framework. Mericle said:

Fed officials have spent considerable time thinking about this over the past decade, and there is a strong institutional preference for the current approach.

Most Fed policymakers and staff believe that the growth of the balance sheet relative to the economy’s size is an inevitable result of the Fed’s increased liability demand and the shift to an abundant reserve framework for monetary policy. Mericle emphasized that current Chair Powell recently gave a speech outlining its advantages, which is seen as setting the tone for the debate.

Mericle believes that if Waller wants to implement balance sheet reduction without pushing up long-term interest rates, the only realistic path is to relax banking regulations, such as adjusting liquidity coverage ratios, to reduce banks’ demand for reserves. However, this would take time and require coordination among multiple parties.

On financial regulation, Waller believes the current system imposes excessive compliance costs on banks, especially small and medium-sized banks. He advocates for regulators to support mergers among small and medium banks and calls for establishing a new U.S.-based regulatory system rather than fully adhering to international Basel accords.

Goldman Sachs frontline trading: Market reactions may already be overdone

Feedback from Goldman Sachs’ global trading division generally downplays Waller’s influence.

Goldman Sachs US Treasury trader BROWN bluntly said that the market has fully priced in the expected balance sheet reduction, such as the narrowing of swap spreads and the steepening of the yield curve. His intuition is that Waller will not truly push for a restart of quantitative tightening because it would be too destructive for risk assets.

Goldman Sachs FX strategist Mike Cahill pointed out a key contradiction: Waller’s past views are inconsistent with the practical commitments needed for his nomination. He said:

We know that willingness to cut rates is at least a prerequisite for getting this job.

Cahill noted that the market’s “hawkish balance sheet” trades based on Waller’s historical views make sense, but implementing them in reality would take longer.

Further, Cahill analyzed that the Fed’s decision-making process is one person, one vote, and compared to the large turnover when Powell took office in 2017-2018, the current personnel changes are much fewer. It will take time for the new Chair to establish influence.

He judges that future policy coordination between the Fed and the Treasury will increase, and Waller might accept the Fed holding more short-term government bonds, but unlikely to engage in “twisting operations.”

Nikhil Choraria, head of European rates trading at Goldman Sachs, interprets that Waller’s “hawkish” stance mainly manifests in the balance sheet, while his “dovish” side is reflected in “restoring” the financial system architecture to allow for lower policy rates.

He frankly states that these views are “difficult to reconcile with the goal of lowering long-term Treasury yields,” and may need to be led by the Treasury.

Will Marshall, head of European rates, believes that market focus initially naturally fell on Waller’s past criticisms.

But he emphasizes that, considering the recent focus of the Trump administration on “affordability” and the Fed’s own recent adjustment of its balance sheet policy path—shifting to a framework that provides ample liquidity through Treasury purchases—the background has changed. He summarized:

The market’s assessment of all this will ultimately depend largely on economic fundamentals.

Markets always misjudge the new Chair, and history repeatedly repeats

Goldman Sachs specifically pointed out that the market’s initial interpretation of Fed candidates often differs significantly from subsequent views.

Each recent predecessor has shown some notable “misleading” in their first year, because they need time to adapt to the state where every word is scrutinized, and the market needs time to learn the new communication style.

Goldman Sachs FX strategist Mike Cahill listed specific examples: Powell’s “long way to go to reach neutral,” Yellen’s “next few meetings,” and Bernanke’s offhand comment to Maria Bartiromo about how markets view his testimony.

Based on Goldman Sachs’s internal economic and trading insights, Waller is a candidate with strong personal convictions, but faces an institution with powerful policy inertia and institutional consensus.

For the market, this means that short-term news volatility around personnel changes may outweigh actual policy shifts. Traders hint that the potential gains from yield curve trades based on Waller’s “balance sheet” views may already be limited.

Risk warning and disclaimer

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest accordingly at your own risk.