How will Donald Trump’s pick for US central bank chairman affect markets?
Former Fed governor Kevin Warsh has been nominated by Mr Trump to replace current chair Jerome Powell when his term ends in May.
Donald Trump has announced his pick for chairman of the US’s Federal Reserve in a move which could instigate change at the central bank at a time when it faces mounting pressure over its independence.
Former Fed governor Kevin Warsh has been nominated by Mr Trump to replace current chairman Jerome Powell when his term ends in May.
The US dollar and European stock markets were moving higher on Friday morning, with experts suggesting that the selection may soothe some investors.
An appointment, which would need to be approved by the US Senate, would mark a return to the US central bank for Mr Warsh who was a member of its board from 2006 to 2011 and served as its governor during the 2008 financial crisis.
He is thought of as a more conservative-leaning economist with a reputation for being relatively “hawkish” – meaning he typically supports higher interest rates to control inflation.
His selection is therefore being viewed by traders and economists as a more moderate choice from the president who has repeatedly called for the Fed to cut the country’s interest rates more quickly.
Nevertheless, experts said investors will be alert to Mr Warsh’s more recent vocalising of his support for lower rates.
Stuart Clark, a portfolio manager at Quilter, said: “Concerns around Fed independence and an erosion on this should now be tempered, although Warsh’s words and actions will be scrutinised by market participants intensely.
“This appointment is also likely to calm markets, which had of late started to get more volatile.”
He added: “As ever in the world of a Trump presidency, things are never quiet and thus investors will need to keep on their toes.”
Luke Bartholomew, deputy chief economist at Aberdeen Investments, said: “Warsh’s experience on the Fed, where he developed a reputation as a very competent crisis-fighter with a good understanding of financial markets, and long track record of independent thought about monetary policy, means he is a credible nomination.
“As chair, he will almost certainly push for lower interest rates, consistent with our forecast of two 25 basis point cuts later this year.”
Mr Trump’s decision comes at a fraught time for current chairman Jerome Powell who, earlier this month, released a video statement to say that he was being threatened by a criminal investigation under Mr Trump’s administration.
Mr Powell said the move related to evidence he gave about renovation projects at the Fed’s office buildings.
But he claimed that the threats were a “consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president”.
The statement prompted central bank bosses around the world, including the Bank of England’s Andrew Bailey, to offer their support to Mr Powell and insist upon preserving the independence of the institution.
The Fed, like other central banks, operates independently of the government – meaning it sets interest rate policy without political interference.
It also means that whoever is picked as chair takes on a key role with a significant amount of power over the world’s biggest economy.
Dan Coatsworth, head of markets at AJ Bell, said: “Investors seem to be taking this as a positive sign in terms of Fed independence – with Warsh perceived as a more orthodox choice versus some of the other mooted names.
“He has previously served as a Fed governor and went up against Powell when he got the job of chair in 2017.
“Whether Warsh will transform from a hawk to a dove thanks to external pressure, assuming he gets the job, will only become clear over time.”
The pound was down by about 0.4% against the US dollar on Friday afternoon. The euro was also down by 0.4% against the US currency.
