Adds market reaction, background.
US president Donald Trump said he would name former Fed governor Kevin Warsh to replace Jerome Powell as chairman of the Federal Reserve.
"I have known Kevin for a long period of time and have no doubt that he will go down as one of the GREAT Fed chairman, maybe the best," Trump said on social media early Friday. "On top of everything else, he is ‘central casting,' and he will never let you down."
Warsh, a graduate of Harvard Law School and a former Morgan Stanley director, became the youngest Fed governor at 35 in 2006, serving through the financial crisis until 2011. During the height of the financial crisis, in 2008, Warsh was a key intermediary between the Fed and Wall Street.
Warsh is also the son-in-law of Ron Lauder, heir to cosmetics giant Estee Lauder and a donor and friend of Trump's who is widely credited as being the person who originally suggested the idea of the US acquiring Greenland during Trump's first term.
Warsh, who has been critical of the Fed in recent years, argued in a Wall Street Journal editorial in November that artificial intelligence and Trump's deregulation agenda gave Fed policymakers margin to ease policy. But he also told an audience in Boston last year that zero interest rates "leads to very bad economic outcomes," according to Pantheon Macroeconomics.
Market reaction
Investors have followed the Fed chair nomination process closely, concerned about if the candidate would maintain the Fed's independence from political pressure. Market reaction Friday to Warsh's nomination was mixed.
The dollar index, which tracks the greenback against six other major trading currencies, rose to 96.9 Friday from 96.25 after falling to a near-four year low on 27 January.
The drop in the dollar has been driven by uncertainty over Trump's tariff and fiscal policies as well as his threats to the post-war US-led world order that raise concerns of the longevity of the dollar as the global reserve currency. Trump's threats to undermine the Fed's independence have also helped weaken the dollar.
CME's FedWatch tool, which follows market sentiment on the Fed interest rate changes, showed marginally increased odds of rate cuts in June, the first month Warsh would be at the helm of the Fed if confirmed. Odds the Fed target rate would be a quarter point lower after the June meeting rose to 49.2pc from 46.9pc on Thursday, while odds the rate would be a half point lower rose to 16pc from 13.7pc.
"We would advise against drawing strong conclusions about the economic and market implications" of a Warsh chairmanship at the Fed, Pantheon said in a note Friday. "Our instincts tell us Mr. Warsh will be more preoccupied with how history will view his record than with continuing to pander to the President."
Replacing Powell
If confirmed by the Senate, Warsh would replace Powell, also a Trump appointee whose term ends in May, even though he can remain on the board of governors.
While Republicans hold the Senate 53-47, a few Republican senators have indicated they will not back Trump's pick if the Department of Justice's criminal probe into Powell's congressional testimony last summer regarding cost overuns at a Fed building is not dropped, Pantheon noted.
Trump has repeatedly derided Powell as a "numbskull" for allegedly being too slow to cut interest rates. The Fed this week kept its target rate unchanged after making three quarter-point rate cuts late last year.
Of the 12 policy makers who voted on the Fed's latest interest rate decision, two Trump appointees, Christopher Waller, who was under consideration for the chairmanship, and Stephen Miran, who joined the board of governors late last year after serving as Trump's top economic adviser, dissented and voted to cut by a quarter point.
Inflation has remained above the Fed's 2pc long-term target while job growth slowed sharply last year. Powell, in comments this week, suggested the Fed was in no hurry to cut rates. The Fed in December penciled in one quarter point cut this year.
