UPDATE 5-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." U.S. stock indexes fell on Friday following the announcement of Warsh's nomination, as investors also digested earnings reports, steep declines in precious metals prices, and a high inflation reading. The U.S. dollar index gained, continuing a rebound after falling to a four-year low earlier in the week. Longer-dated ​U.S. Treasury yields rose.

Warsh must be confirmed by the Senate, and markets have focused on the degree to which Trump's Fed chair nominee will be susceptible to White House pressure to lower interest rates. Trump has castigated the Fed and Powell for not cutting rates more significantly. Earlier this ‍week, the Fed held rates steady, after lowering its benchmark rate to 3.50%-3.75% last year. Interest-rate futures markets stuck with anticipating two 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? Some high-profile members of the investment ⁠and finance community said Warsh was a qualified and credible candidate.

"I have known Kevin for many years in his many capacities serving our country and his background and experience are suited to the role," Brian Moynihan, Bank of America chair and CEO, said in a statement. Warsh has "traditionally been an inflation hawk, so he has credibility and Fed experience," said Robert Dishner, fixed-income portfolio ‍manager at Neuberger Berman.

While investors think Warsh will be inclined to cut rates, they expect him to rein in the Fed's balance sheet. "Warsh has been consistently critical of the Fed's active use of its balance sheet" over the past 15 years or so , Deutsche Bank economists said in a note.

J.P. Morgan's chief U.S. economist, Michael Feroli, ​said in a note that he was "more aligned with conventional thinking" that a smaller Fed balance sheet should exert some moderate upward pressure on longer-term interest rates. The dollar, which slumped almost 10% last year, has come under renewed selling pressure this month, due in part to ⁠U.S. policy uncertainty.

"It's never a good thing when you have concerns about the U.S. having a weak dollar policy ... but one of the reasons why the trade had gotten so aggressive is because people were concerned that Trump would nominate someone less independent and he's done the opposite," said Jamie Cox, managing partner at Harris Financial Group. FED INDEPENDENCE UNDER SCRUTINY

Central bank independence from political pressure is a quality ⁠economists say is the bedrock of any central bank's inflation-fighting capabilities. "What's most important is this whole question of Fed independence," said Paul Karger, co-founder TwinFocus Capital Partners in Boston. That said, Karger believes that Warsh will not choose to rock that boat. "He's got prior Fed experience and Wall Street credibility; he's aware that he has a fiduciary duty. He understands that if there's no Fed independence, all bets are off."

Concerns about Fed independence ratcheted up recently with the revelation of a federal investigation into Powell, who called the probe a "pretext" to pressure the central bank on monetary policy. Investec economist Sandra Horsfield said even ⁠the announcement by Trump of his Fed pick 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. Several investors noted that Warsh would be only one vote on the ‌Fed policy-making committee.

Benjamin Connard, portfolio manager at Carnegie Investment Counsel, in Stamford, Connecticut, said "only time will tell" how Warsh works as chairman, but noted that "rates are set by the majority, so Warsh alone cannot cut them." "For a long-term investor, as long as there is continued confidence in the Fed as a whole, this nomination should not change your perspective," Connard said.

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