Written by Warsh emerges as new favourite for Fed chair
The race for who will replace incumbent Fed chair, Jerome Powell, is almost over, with President Trump set to announce his preferred candidate later on Friday. But after months of speculation, the excitement is far from being over, as a new favourite has emerged just days after BlackRock’s Fixed Income Chief Investment Officer, Rick Rieder, unexpectedly entered the race to take the lead.
The spotlight has now turned to former Fed Governor Kevin Warsh to be nominated by Trump as the next Fed chief after Bloomberg reported that Warsh was spotted at the White House on Thursday. If Warsh is confirmed by Trump as his pick, it would be somewhat of an unusual move for the President, who until now seemed intent on appointing a very dovish candidate that would almost certainly call for much lower interest rates.
Warsh, who has a track record of being an inflation hawk during his five-year tenure as a governor, is probably the least obvious choice for Trump. But it’s likely that Warsh’s views have changed since he last served on the Board in 2011.
Dollar bounces back as yields rise
Nevertheless, markets see a reduced probability of the new Fed chair being Trump’s champion for ultra-low rates, and Treasury yields have spiked higher on the rumours, pushing the US dollar higher.
Against a basket of currencies, the dollar is about 0.3% firmer, paring its weekly losses following a tumultuous few days. It’s up the most against the Japanese yen and Australian dollar, climbing above 154 yen, while the aussie has slipped below $0.70.
A bigger-than-expected decline in core CPI in the Tokyo region in January is adding to the yen’s slide today.
The euro and pound are down by about 0.4% each, dropping to around $1.1920 and $1.3745, respectively.
Easing US and geopolitical risks batter gold
Gold and other precious metals have taken the biggest hit, however, as the possibility of Warsh taking the helm at the Fed not only implies fewer rate cuts over the next year, but it also poses a smaller risk to the Fed’s independence being compromised by the White House.
The Trump administration’s conciliatory tone of late is also visible in the talks to strike a deal with the Democrats to avoid another government shutdown, as well as in the standoff against Iran.
It appears that Senate Republicans and Democrats have reached an agreement for a new package that will fund the government until the end of September. The deal includes spending bills for five key government departments but not for Homeland Security, which will only receive temporary funding to allow Democrats and Republicans time to negotiate reforms for the department following the killing of two protesters by ICE agents in Minneapolis.
Although it’s unlikely that Congress will be able to pass the legislation by today’s deadline, a partial shutdown of several days is not seen as causing much disruption.
Meanwhile, as a US military fleet arrives in the Middle East, Washington and Tehran have reportedly been holding talks in recent days, suggesting Trump will try to negotiate a nuclear deal before he orders any strikes on Iran.
All this has been bruising for gold, which is down about 6.5% on Friday to around $5,040/oz. Silver has fared worse, crashing 15% to plunge below $100/oz, while WTI oil futures are down about 1.25% to $64.60 a barrel.
Caution on Wall Street after mixed earnings, Fed speculation
Cryptos have also been caught up in the selloff, with Bitcoin tumbling towards the $81,100 region and on track for its fourth straight monthly loss.
But equities have avoided a panic selloff from the Fed pick headlines and European shares are mostly positive today, despite Wall Street ending Thursday in the red after a volatile session.
Microsoft’s shares slumped by 10% on Thursday on renewed jitters about AI spending following Wednesday’s earnings results. On the other hand, Facebook’s Meta surged by a similar amount as its AI investments appeared to be doing a better job of boosting revenue growth. Apple has also helped to soothe some of the earnings angst as the company posted a large beat in revenue yesterday, boosted by strong iPhone sales, particularly in China.
Still, futures are currently down, as investors await Trump’s official announcement of the new Fed chair.
By XM.com
