From interest rate game to institutional game: Senator calls for halt to Waller reform, regional Fed power struggle may trigger severe market volatility.

Democratic Senator Elizabeth Warren from the U.S. Congress is demanding that Federal Reserve Governor Christopher Waller halt his comprehensive reform of the operations of the 12 regional Federal Reserve banks. Since Waller officially took office as Chair of the Federal Reserve on May 22, 2026, and also as Chair of the Federal Open Market Committee (FOMC), it seems that the Federal Reserve is undergoing two major reform initiatives simultaneously, one focusing on "reprogramming the policy reaction function" and the other on "recentralizing institutional governance". Waller's push to integrate the backend functions of the 12 regional Fed banks essentially involves an organizational engineering within the Federal Reserve of "clouding, centralization, and standardization": shifting functions such as human resources, information technology, procurement, finance, and supplier management from a decentralized regional architecture to a nationally unified architecture, logically similar to large tech companies reducing redundant systems and unifying data layers and operational platforms. However, Senator Warren's latest counterattack indicates that this issue has escalated from efficiency reform to governance structure controversy: the regional Fed banks were originally key nodes in the decentralized credit system of the Federal Reserve, and regional Fed presidents are often more vigilant about inflation than the Washington governors; if the control over backend administration, personnel, and budget is centralized in Washington, the market may be concerned about the independence of monetary policy and the weakening of regional voices. As the chief member of the Democratic Party on the Senate Banking Committee, Warren wrote a letter to Waller urging him to stop his proposal regarding the Federal Reserve regional reserve banks as it seems to not comply with federal law, and implies that the proposal could undermine the central bank's monetary policy independence. While Waller, as Chair of the Federal Reserve Board's Reserve Bank Affairs Committee, has significant oversight, the regional reserve banks were set up as largely autonomous entities controlling their daily operations. Warren believes that Waller's series of latest proposals could weaken the central bank's monetary policy independence as the attempt to please President Trump, who seeks greater influence over the selection of regional reserve bank presidents. The situation within the Federal Reserve is becoming increasingly contentious, as Waller's push for the integration of backend functions of the 12 regional Fed banks is being targeted by Warren. A spokesman for the Federal Reserve confirmed receiving Warren's letter but declined to comment further. In two speeches this spring, Fed Governor Waller, who was successfully appointed by Trump in 2019, outlined a vision for integrating certain backend functions of the regional reserve banks, such as human resources and information technology. He also mentioned that regional leaders have reached an important framework on this matter. Officials and staff within the entire system of the Federal Reserve are becoming increasingly concerned that Waller's push could ultimately shift power and decision-making from the regional banks to Washington, exposing the Fed to greater political pressure from President Trump. Trump and his allies have been trying to exert more influence on the Federal Reserve's policy direction, institutional structure, personnel changes, including the unprecedented attempt by the President to dismiss Fed Governor Lisa Cook, and the DOJ launching a criminal investigation against former Chair Jerome Powell. Senior government officials have also suggested reforms for the regional reserve banks. These developments coincide with Trump's continuous calls for a significant reduction in benchmark interest rates, a demand that the Federal Reserve has not yet met. While inflation pressures are rising again this year, many Fed leaders from the regional banks are signaling a possible return to rate hikes. Regional reserve bank presidents have historically been more cautious about inflation than the seven Fed governors in Washington. Warren's letter includes 14 key questions, requesting Waller to provide more details on the organizational changes, explain the framework and its development process, how centralizing power in Washington could affect staffing levels and other aspects of the Federal Reserve Bank system, and whether he has threatened to reject any annual budget proposals from reserve banks that do not comply with his or others' requests. She has asked for a response from Waller by July 16. With Waller's direction and the new policies from the Fed under Chair Waller coming into effect, the market volatility may intensify, especially for investors betting on the Fed's dovish path or those over-leveraged in tech growth stocks and other risky assets. Since taking office, Chair Waller seems to be carrying out two main initiatives at the Federal Reserve: reprogramming the policy reaction function and centralizing institutional governance. Market participants should be prepared for potentially heightened volatility in the short term due to these changes, particularly for investments in Tech growth stocks and other high-risk assets. The Fed's efforts to shift focus from forward guidance to real-time economic data could also impact market expectations.