UPDATE 4-Investors gain some Fed clarity with Warsh choice, but mull rate path

The choice of Kevin Warsh to lead the U.S. Federal Reserve clears uncertainty on Wall Street about the central bank's likely next chair, ‌but leaves investors weighing how the former Fed governor's past hawkish leanings will mesh with President Donald Trump's insistence on far lower interest rates. Warsh, whom Trump nominated on Friday to lead the U.S. central bank, ending a months-long process, had been one of four candidates widely tipped as potential successors to Jerome Powell, whose term as chair ends in May. A proponent of tighter monetary policy as a Fed governor from 2006 to ⁠2011, Warsh said recently that Trump is right to press for interest-rate cuts.

"He was considered a hawk, but recently he seems to have aligned himself with Trump, so it's kind of difficult to assess how the market is going to accept this nomination," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "We just have to see whether or not he will be influenced by the White House." Major U.S. stock indexes fell modestly in morning trading on Friday following the announcement of Warsh's nomination, as investors also digested a wealth of earnings reports. The U.S. dollar index was gaining, ​as it also continued a recent rebound after falling to a four-year low earlier in the week. Longer-dated U.S. Treasury yields moved higher during the session.

Warsh must be confirmed by the U.S. Senate, and markets have been highly focused on the degree to which Trump's nominee to lead ‍the central bank will be susceptible to White House pressure to lower interest rates. Trump has castigated the Fed and Powell in particular for not cutting rates more significantly. Earlier this week, the Fed held rates steady in its latest monetary policy decision, pausing an easing cycle after lowering its benchmark rate to 3.50%-3.75% last year. Interest-rate futures markets stuck with anticipating two U.S. rate cuts in 2026, with the likely next reduction in June, after the new chair takes over. Trump said on Friday it would be inappropriate to ask Warsh whether he would cut interest rates, but added he was confident Warsh was inclined to lower borrowing costs.

"He's abundantly qualified and will likely continue to be an independent thinker, not a ⁠puppet of the ‌President," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin. "He ⁠may want lower rates for now, but not forever. A year from now, we may hear complaints from the White House about him." Warsh was not immediately available for comment. A Fed spokesperson said it did not have a comment.

A SMALLER BALANCE SHEET? World markets were 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. 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." While investors think Warsh will be inclined to cut rates, they expect him to rein in the Fed's balance sheet.

The greenback, which slumped almost 10% last year, has come under renewed selling pressure this month, due in part to U.S. policy uncertainty. FED INDEPENDENCE UNDER ⁠SCRUTINY

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?'"

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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