Old Policies Abandoned, No New Rules Established! Federal Reserve Policy Enters Window Period, Waller’s Reform Awaits Long-Term Turnaround

FXStreet July 31 News——Why is Walsh facing skepticism, and where are the turning points and trump cards?

The new Federal Reserve Chair, Walsh, is leading sweeping reforms in monetary policy, proactively abandoning the forward guidance mechanism that has been used for over a decade.

In the short term, there is a clear disconnect during the transition between old and new policies. The brand-new standardized interest rate decision framework has yet to be implemented, resulting in a temporary policy vacuum for the Federal Reserve.

With internal disagreement among committee members and persistent inflationary pressures, there is widespread market skepticism about the effectiveness of this reform, plunging monetary policy expectations into chaos and consequently making it a central disruption for global financial markets in the short run. However, from a long-term perspective, Walsh is not botching reform. He is strategically addressing the shortcomings of the old system, supporting his approach with in-depth research from five specialized task forces, with the aim of constructing an entirely new, objective, and implementable modern policy framework that holds significant turnaround potential going forward.

Short-term Reform Pains Emerge, Market Skepticism Surges

After this round of Federal Reserve reforms was implemented, the disconnect in the short-term policy system was thoroughly exposed, sparking multiple doubts from Wall Street institutions, economists, and even within the Federal Reserve itself. The market's pessimistic interpretation of the new policies under Walsh quickly intensified.

This July's FOMC meeting only maintained rates unchanged, with no supporting policy details or rate guidance. The minimalist policy statement, combined with a lack of post-meeting framework explanation, left the market without a trading anchor.

On one hand, internal dissent and opposition have surfaced within the Federal Reserve, with some governors openly questioning the reform model of abolishing forward guidance and weakening policy communication. They argue that monetary policy without clear signaling will only lead to greater market volatility and cannot effectively regulate inflation and the financial markets.

On the other hand, mainstream investment banks and trading institutions are largely bearish on the short-term effectiveness of this round of reforms, contending that Walsh’s hasty abandonment of the old without establishing the new has led to a collapse of the policy expectation system built over decades by the Fed.

Market reactions have echoed these anxieties: U.S. Treasury markets have experienced extreme volatility, long-term yields continue to rise, U.S. stocks have seen increased fluctuations, global risk appetite has contracted rapidly, and overall, the market consensus is that Walsh’s reforms have temporarily failed, with rumors of reform failure spreading widely.

From the market’s perspective, there is an evident “interregnum” dilemma: Walsh decisively halted the Federal Reserve’s long-standing normalized forward guidance communication model, completely abandoning the old policy rhetoric system. Yet, new interest rate decision rules and market response mechanisms are not in place, leaving the Fed in a “rule-less and standard-less” policy stalemate in the short term.

Without forward guidance to shape expectations, compounded by three committee members voting for a rate hike at this FOMC meeting, internal policy disagreements have become public, escalating market fears further. The outside world generally sees the latest reforms as stalled, and even failing.

Core Rationale for Abandoning the Old: Flaws in the Former Mechanism Had Already Emerged

In fact, Walsh’s decision to abandon forward guidance is not a reckless move, but a targeted response aiming directly at the core issues of the old system.

Since the 2008 financial crisis, the Federal Reserve has long depended on forward guidance to lock in interest rate paths and guide market expectations, but that mechanism is severely misaligned with today’s economic environment.

The largest drawback of traditional forward guidance is that it results in policy rigidity and severe lag, often locking in the interest rate trajectory in advance, only to become increasingly disconnected from real-time inflation and employment data, with policy signals frequently running counter to market trends.

Additionally, the Federal Reserve’s past economic forecasts have had low accuracy. For example, in the early 2020s, it misjudged persistent high inflation as “transitory,” ultimately leading to delayed monetary policy responses and uncontrolled inflation, demonstrating the failure of traditional forward guidance.

Walsh’s abandonment of the old model is fundamentally about rejecting a subjective and lagging policy system to pave the way for new reforms, not a misstep in reform.

Short-term Policy Confusion Is Real—But Market Misunderstandings Are Amplified by Cognitive Bias

The current policy vacuum and expectation turmoil at the Fed are natural pains of the reform transition period, not evidence of reform failure.

During the gap between old and new regimes, the market has lost the familiar policy yardstick, and with the Fed’s own short-term cognitive bias, market misunderstandings have been amplified.

The most typical example is the divergence between the policy rate and the market rate: in 2026, the Fed’s benchmark rate remains unchanged, but market-driven rates rise sharply. Walsh blamed this solely on the cancellation of forward guidance in the short term, sparking doubts about his policy judgment.

But in reality, the decoupling of the policy and market rates is a long-term structural issue since 2008, stemming from the inherent flaws of the Fed’s ample reserve floor system, not a direct result of this reform. This detail highlights the transitional challenge of policy adaptation and also serves as the main basis for market skepticism about Walsh’s reforms.

Meanwhile, policy swings within the FOMC have further fueled negative market sentiment.

In March this year, all officials saw no rate hike expectation, and the market leaned towards rate cuts. Yet only three months later, three members advocated for hikes, while core variables such as inflation fundamentals, geopolitical issues, and fiscal spending had not changed materially.

This kind of subjectively driven, rule-less policy fluctuation reflects the transition between the defunct old system and the yet-to-be-established new framework, rather than being a strategy error by Walsh.

The Key to a Long-term Turnaround: Five Task Forces Laying the Groundwork for a Modern Policy Framework

The market focuses on short-term reform pains and policy vacuum but overlooks Walsh’s critical long-term plan—the five special reform task forces announced at the June inaugural press conference. These serve as the backbone of the Federal Reserve’s deep reforms and will ultimately end the current policy chaos.

The five task forces are focused on the following core areas: policy communication mechanisms, balance sheet policies, economic data systems, productivity and employment, and the inflation framework. Bringing together economists from Harvard, University of Chicago, former central bankers, and industry experts, these teams are conducting a comprehensive review of the Fed’s legacy issues, seeking to build a brand new monetary policy system tailored to today’s economy, the AI industry, and geopolitical realities.

Unlike previous piecemeal adjustments, these five teams represent a systematic, foundational overhaul. The core objective is to build a standardized, quantifiable, objective, practical, and predictable framework for interest rate decisions.

Specifically, the data task force will reconstruct the Federal Reserve’s economic monitoring system, moving beyond lagging official data by incorporating high-frequency big data and private sector economic data to precisely track changes in inflation and employment at the margin;

The inflation and productivity team will combine advances in AI and industrial upgrading to reshape inflation assessment standards and solve the current ambiguity problem; while the communications and balance sheet teams will enhance the transmission mechanism, addressing the structural issue of long-term separation between policy rates and market rates.

The End of the Transition Period Nears—The New Framework Will Transform the Landscape

The current policy vacuum, internal disagreements, and expectation confusion at the Federal Reserve are part of an inevitable process of reform and evolution. Walsh’s active abandonment of old rhetoric and refusal to rely on invalid forward guidance, choosing instead to base new policy on the deep research of five task forces, represents a strategy of enduring short-term pain for long-term stability.

Once the five task forces complete their comprehensive assessments and finalize the reform proposals (what the market calls the “Five Department Policy White Papers”), the Federal Reserve will officially implement a unified, quantifiable, and transparent set of interest rate decision rules.

At that time, the Federal Reserve will break free from subjective policy swings, internal disarray, and market expectation turbulence, establishing a clear policy response mechanism for precise matching of inflation, employment, and interest rates.

In summary, Walsh’s reforms are not a failure, but rather an initiative to break with the past and build anew.

Short-term market skepticism, policy vacuum, and volatility are all normal during the transition period. As the achievements of the five task forces materialize and the new policy framework takes shape, policy uncertainty at the Federal Reserve will completely dissipate. This much-debated reform will ultimately result in a long-term turnaround and reshape the logic of global macro market pricing.