UPDATE 3-Markets ponder life under a Fed run by Kevin Warsh

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 on Friday named former Federal Reserve Governor Kevin Warsh to lead the U.S. central bank, ‌lifting months of uncertainty and leaving investors to assess how monetary policy in the world's biggest economy might evolve. Trump had said a day earlier that he would name a successor to Federal Reserve Chair Jerome Powell, whose term ends in May. Betting markets moved quickly to price in Warsh following reports he had visited the White House on Thursday.

World ⁠markets have been shaken at the start of 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 also kept financial assets on edge. Warsh, a proponent of tighter monetary policy as Fed governor from 2006 to 2011, has said recently that Trump is right to press for interest-rate cuts.

Lloyds FX strategist ​Nick Kennedy said that, from a policy perspective, Warsh's track record is more on the hawkish side and noted his preference for a smaller Fed balance sheet. "In the interview process you have to be aligned with what Trump ‍wants on policy rates. I don't think this is a role you would want to step into if you were in conflict with that," Kennedy added. "So that idea that this is good for the dollar is going to be short-lived."

The U.S. currency trimmed its gains following Trump's announcement, while Treasury bond yields were higher and stock futures pointed to a weak open on Wall Street. 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 5% 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.

The greenback, which slumped almost 10% last year, has come under renewed selling pressure this month, due in part to U.S. policy uncertainty. "We just ‍have to see whether or not he will be influenced by the White House," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

"My guess is that he will not and that he will look very carefully, he will be somewhat ​balanced in terms of inflation, labour markets. Less determined than Powell, but not that far apart." 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 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. He "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 for the dollar against other major currencies 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.

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