Financial markets reacted sharply to reports that former Federal Reserve Governor Kevin Warsh is President Trump’s likely nominee to head the U.S. Federal Reserve. The announcement, expected imminently, will end months of speculation regarding who will succeed Jerome Powell when his term concludes in May. Warsh is viewed as a more hawkish choice compared to other potential candidates, prompting significant market adjustments in anticipation of tighter monetary policy.
The initial market response was volatile, particularly in Asia. The U.S. dollar strengthened against other major currencies, while long-dated bond yields increased, reflecting expectations that Warsh would be less inclined to suppress yields through Federal Reserve spending. Conversely, gold prices declined by 3%, along with Bitcoin, which fell by 2%. U.S. stock futures also edged lower, experiencing a 0.5% decrease.
Market analysts believe that Warsh’s appointment would signal a shift towards reducing the Fed’s balance sheet, even as he may favour lower interest rates. This contrasts with other candidates, such as BlackRock’s Rick Rieder, who were expected to maintain a flatter yield curve. Kevin Warsh has previously called for a regime change at the central bank, a goal seemingly at odds with President Trump’s preference for looser monetary policy.
The Federal Reserve’s interest rate decisions significantly influence both short-term interbank lending rates and long-term interest rates, impacting borrowing costs for consumers and companies. The markets are now adjusting their positions, unwinding previous bets made in anticipation of other candidates, and bracing for a potentially more restrictive monetary policy under Warsh’s leadership. Investors expect him to rein in the Fed’s balance sheet.
