By Saqib Iqbal Ahmed and Tom Westbrook
NEW YORK/SINGAPORE, Jan 30 (Reuters) – President Donald Trump’s nomination to head the U.S. Federal Reserve will lift a cloud of uncertainty that has hung over markets for months, giving investors a signal of how monetary policy may evolve once Jerome Powell’s term ends in May.
Trump said on Thursday he would name Powell’s successor on Friday, and all eyes focused on former Fed Governor Kevin Warsh. Bloomberg News reported Warsh will get the nod, while a person familiar with the matter told Reuters that Warsh had met Trump at the White House on Thursday.
Warsh would be one of the more hawkish picks among the perceived candidates, market participants said of the choice, for which they have been gaming out scenarios for months.
“If the nominee is indeed Warsh, we could actually end up with a Fed that tilts hawkish at the margin,” said Sonu Varghese, global macro strategist at Carson Group in Chicago.
DOLLAR, LONG BOND YIELDS UP, GOLD, U.S. STOCK FUTURES DOWN
Markets responded to the news in a volatile Asia session, with the dollar and long-dated bond yields rising. While investors think Warsh will be inclined to cut interest rates, they expect him to rein in the Fed’s balance sheet.[MKTS/GLOB]
Gold was down 3% along with other beneficiaries of Fed asset-buying: bitcoin fell 2% and U.S. stock futures were 0.5% lower. Interest rate futures markets stuck with anticipating two U.S. rate cuts in the second half of this year, after the new chair takes over.
The other leading candidates for the role have been Fed Governor Christopher Waller and BlackRock’s chief bond investment manager, Rick Rieder. White House economic adviser Kevin Hassett was an early frontrunner but is now seen as an unlikely choice after Trump said he would rather keep him in his current post.
Fed interest-rate decisions impact not only the daily rate at which banks lend to each other but also long-term interest rates, as measured by long-dated U.S. Treasury yields, which in turn influence borrowing costs for consumers and companies.
The president wants the Fed to cut deeply and has piled pressure on Powell – whom he has nicknamed “Too Late” for hesitancy in complying with Trump’s wishes for looser policy.
FOCUS ON HOW NEXT FED CHAIR HANDLES POLITICAL PRESSURE
Trump’s pick will be scrutinized for his perceived ability to carry out monetary policy without ceding to political pressure, a quality that economists say is the bedrock of any central bank’s inflation-fighting capabilities and what underpins the financial stability of the U.S. economy.
Warsh has called for regime change at the central bank, seeking among other things, a smaller Fed balance sheet, a goal seemingly at odds with Trump’s preference for looser monetary policy.
Warsh “is on record as saying he prefers lower rates,” said Damien Boey, portfolio strategist at Wilson Asset Management in Sydney. “But the trade-off that he makes with lower rates is that he wants the Fed to have a smaller balance sheet. The markets are reacting as if thinking: ‘What would the world look like with a smaller Fed balance sheet?'”
Gains of around 0.5% for the dollar against other majors as well as selling at the long end of the bond market, which steepened the yield curve, reflected bets that Warsh would be less inclined to suppress yields with Fed spending.
“The market just unwound their positions for Rick Rieder, who would flatten the curve,” said Kentaro Hatono, head of global fixed income at Asset Management One in Tokyo.
“Instead, the market bet on curve steepening as Warsh would tighten the Fed’s balance sheet.”
(Reporting by Saqib Iqbal Ahmed, Rae Wee, Kevin Buckland, Junko Fujita and Tom Westbrook; Editing by Megan Davies and William Mallard)
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