UPDATE 2-Markets brace for change at Fed as Trump set to name new chief

DOLLAR, LONG BOND YIELDS UP, GOLD, U.S. STOCK FUTURES DOWN While investors think Warsh will be inclined to cut rates, they expect him to rein in the Fed's balance sheet.

U.S. President Donald Trump looks set to pick a new Federal Reserve chief on Friday, lifting the ‌uncertainty that has hung over markets for months and leaving investors to assess how monetary policy in the world's biggest economy will now evolve. Trump said on Thursday he would name a successor to Fed Chair Jerome Powell, whose term ends in May. Betting markets were focused on former Fed Governor Kevin Warsh, who met Trump at the ⁠White House on Thursday, a person familiar with the matter told Reuters.

World markets have been shaken early in the year by Trump's threats to impose tariffs on European allies over Greenland and heightened geopolitical tensions. Fresh worries about the independence of the U.S. central bank after the Trump administration's decision to open a criminal investigation into Powell this month have added to the turbulence. A surprise Fed announcement cannot be ruled out: speculation about the next chief has flip-flopped between candidates including BlackRock's chief ​bond investment manager Rick Rieder and White House economic adviser Kevin Hassett.

But the odds-on favorite according to betting platforms is Warsh - a proponent of tighter monetary policy as Fed governor from 2006 to 2011 who has said ‍recently that Trump is right to press for interest-rate cuts. "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.

That has led stocks lower and the dollar and U.S. Treasury yields higher on Friday. DOLLAR, LONG BOND YIELDS UP, GOLD, U.S. STOCK FUTURES DOWN

While investors think Warsh will be inclined to cut rates, they expect him to rein in the Fed's balance sheet. Gold slid 7% on Friday along with other beneficiaries of Fed asset-buying: bitcoin ⁠fell over ‌2% and U.S. stock futures slipped. 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.

"Warsh would be seen as a credible choice and would ease some concerns over Fed independence," said Jefferies chief economist Mohit Kumar. "However, Warsh's previous comments have been on the hawkish ‍side, and he is unlikely to follow any agenda of aggressive easing beyond what fundamentals suggest," he said, adding this should weigh on risk assets and bonds and support the dollar.

The greenback, which slumped almost 10% last year, has come under renewed selling pressure ​this month, in part on U.S. policy uncertainty. A BIG DEAL FOR MARKETS

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. 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 Fed, seeking among other things a smaller 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. Investec economist Sandra Horsfield said even the announcement by Trump of his pick for Fed Chair may not alleviate all uncertainty.

"We still have the question whether this will actually get through to full confirmation by the Senate anytime soon, given that there's still the standoff between some of the members of the Senate over ⁠Fed independence questions and Powell's subpoena," she said.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)