The Federal Reserve is facing a credibility crisis, and the new leader must implement reforms

The Powell Investigation Incident Sparks Deeper Reflection on the Federal Reserve’s Issues. Allianz Chief Economist Mohamed El-Erian pointed out that this is not just a personal matter but exposes a crisis in the already fragile public trust in the Federal Reserve. As Powell steps down in May and a new chair is about to take office, how to implement necessary reforms and restore the effective operation of this the world’s most influential central bank has become a market focus.

The Deep-Seated Issues of the Trust Crisis

Impact of the Incident Itself

The Powell investigation incident is not an isolated event but a manifestation of systemic issues within the Federal Reserve. El-Erian emphasized that the current situation may reveal deeper problems, further weakening the already fragile public trust in the Fed. This means market confidence in the Federal Reserve is relatively vulnerable, and any new negative event could exacerbate this trust crisis.

Challenges to the Federal Reserve’s Credibility

According to relevant information, the credibility issues facing the Federal Reserve mainly stem from several aspects:

• Mismanagement of policy expectations: Internal disagreements within the Fed over the timing of rate cuts leading to market confusion
• Transparency issues in decision-making: Public disagreements between Powell and Treasury Secretary Trump over the number of rate cuts (Trump advocates 1, Powell advocates 3)
• Leadership stability: Power transitions during critical periods may trigger market uncertainty

The Reform Pressure on the New Chair

Key Timing of the Power Transition

Powell will step down in May, with the new chair expected to take office in June. This time window is particularly critical:

• January to May: Powell remains in office, and the market is adjusting expectations for the transition
• June to year-end: The new chair takes the helm, requiring rapid establishment of market confidence
• Rate cut expectations for 2026: Trump has confirmed an expected 3-4 rate cuts this year, and the new chair needs to rebuild policy credibility within this framework

Necessity of Reform

El-Erian explicitly stated that the successor must be committed to implementing necessary reforms. These reforms may include:

• Enhancing transparency and consistency in decision-making processes
• Improving communication mechanisms with government departments
• Strengthening market expectation management
• Restoring public trust in the Fed’s independence and professionalism

Market Expectations for the New Chair

Uncertainty in Policy Direction

According to multiple sources, there are differing views in the market regarding the new chair’s policy stance:

Logic Behind Market Reactions

The market is already adjusting expectations for the transition. Data shows that the sideways movement since December reflects the uncertainty about rate cuts in March-April 2026. This indicates investors are waiting for policy signals from the new chair.

Impact on Cryptocurrency and Risk Assets

Chain Reaction of Liquidity Expectations

The credibility crisis at the Fed and the power transition will directly influence liquidity expectations:

• If the new chair effectively implements reforms and rebuilds credibility, market expectations for rate cuts will stabilize, benefiting risk assets
• If reforms are ineffective and credibility continues to decline, markets may fall into greater uncertainty, leading to increased volatility in risk assets

Historical Reference

Based on available data, the performance of BTC during previous rate cut cycles:

• During the September-December 2024 rate cut period: BTC reached $108,000
• During the 2025 rate cut period: BTC reached $126,000
• For the expected rate cuts from March to September 2026: markets anticipate BTC can maintain this upward trend

Summary

The core issue of the Powell incident is not about personal misconduct but about exposing a credibility crisis at the systemic level of the Federal Reserve. The reform pressure on the new chair is tangible, affecting not only the Fed’s effective operation but also directly influencing global financial market liquidity expectations. From current market reactions, investors are waiting for policy signals from the new chair. If the new chair can effectively implement reforms and rebuild confidence, the rate cut expectations for the first half of 2026 will become clearer, which is positive for risk assets. However, if reforms are ineffective, market uncertainty may persist and intensify, leading to increased volatility. This is a critical transition window, and the market’s direction largely depends on how the new chair responds to this credibility crisis.