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On the Eve of a Major Policy Shift for the Federal Reserve: Chairmanship Change and a Battle for Tools! ⑴ The U.S. Federal Reserve's policy mechanism may be facing fundamental changes. ⑵ Recent moves by U.S. senators to strip the Fed of key tools for controlling interest rates, coupled with the ongoing battle for Fed Chairman Powell's succession, suggest that future monetary policy tools will face increased scrutiny. ⑶ While there are currently no signs of changes to the Fed's monetary policy mechanism, this may change as President Trump prepares to appoint Powell's successor. ⑷ Republican Senator Ted Cruz previously pushed to end the Fed's interest payments on bank reserves. If successful, this would upend the Fed's approach to managing interest rates and significantly impact its large bond holdings. ⑸ How the Fed uses bond purchases and its balance sheet to regulate the economy is also attracting considerable attention. ⑹ Since 2022, the Fed has reduced its bond holdings by over $2 trillion. The market expects the reduction to end when the balance sheet falls to approximately $6.1 trillion, while Fed Governor Waller even believes it could fall to $5.9 trillion. ⑺ Some potential successors to the Fed chairmanship, such as former Fed Governor Walsh, have even proposed a more radical bond reduction plan in an effort to boost the real economy. ⑻ Former New York Federal Reserve Bank President Dudley and former senior Fed official Ellen Meade both pointed out that returning to the policy system before the financial crisis would be a difficult task that could bring macroeconomic pain. ⑼ The current losses faced by the Fed are not inherent problems with the interest rate control system, but rather a result of stimulating the economy by purchasing longer-term bonds. ⑽ Analysts at forecasting firm LH Meyer pointed out that recent developments are largely related to the Republican Party's continued pressure on the Fed to ease its policies.