(Jan 31): Relief that President Donald Trump said he would tap Kevin Warsh to head the Federal Reserve (Fed), rather than someone seen as more willing to ignore inflation and slash interest rates, sent the US dollar and short-dated Treasuries rallying.
The move ended weeks of speculation in markets about who would replace Jerome Powell, who Trump has attacked repeatedly, and how that would affect markets. The intense pressure on the Fed to lower rates — and a criminal probe into its headquarters renovations revealed earlier this month — had left money managers on edge by fanning fears about its continued political independence.
The dollar rebounded, sending an index of the currency up 0.8%, because Warsh developed a reputation as an inflation hawk during his previous stint at the Fed and was seen as the least dovish of those under consideration. But Warsh also aligned himself with Trump in 2025 by arguing publicly for lower rates and the reaction in the bond market indicated traders expect him to guide the Fed to do so, with two-year Treasury yields dipping and longer-term rates edging up. Gold, which had surged to record highs, abruptly reversed course on Friday, when it was hit by the biggest daily decline since the early 1980s.
The pick capped what had been a volatile month, when markets were whipsawed by Trump’s talk of invading Greenland and concern about the central bank’s inflation-fighting credibility. At its meeting this week, the Fed held its benchmark rate steady amid signs of stabilisation in the labour market.
“It will be tough for this administration to have its cake and eat it, too,” said Gregory Faranello, the head of US rates trading and strategy for AmeriVet Securities. “We’re in a different inflationary pot and they will want the economy to do well.”
See also: Trump picks a reinvented Kevin Warsh to lead the Federal Reserve
The nomination process was also delayed in part by the recent Department of Justice investigation over cost overruns at the Fed’s Washington headquarters, a move that Powell said was retaliation for not caving to Trump’s demands for lower rates. The probe has sparked opposition in the Senate, which is required to approve nominations.
“I am not sure Warsh is anyone’s favourite choice, including Trump, but things clearly changed post-Powell’s Fed Independence push back and a souring Congressional confirmation path,” said George Catrambone, the head of fixed income at DWS Americas. “Clearly Trump knew it was Warsh this week and he avoided overshadowing Powell’s FOMC (Federal Open Market Committee) press conference, so I do think he’s trying to deescalate and clear a path for Powell to step down.”
The Bloomberg Dollar Spot Index headed for its best one-day gain since July on Friday as gold and silver prices tumbled. Treasuries were mixed, as two-year yields slipped three basis points and 30-year rates pared early selling and were up two basis points to 4.87%. That left the Bloomberg Treasury index hardly changed for January — the index was down 0.04% as of Jan 29 — and follows a gain of more than 6% in 2025, its best annual performance since 2020.
See also: Trump administration prepares for Warsh Fed chair nomination — Bloomberg
Traders in interest-rate swaps tied to future Fed meeting dates continued to fully price the first quarter-point rate reduction in July and were pricing in two such cuts by December. Powell’s term expires in May.
Warsh was considered an inflation hawk during his previous stint at the Fed, when he often emphasised price risks during the financial crisis while others focused on growth. But there are still questions about his policy direction after he recently aligned himself with Trump and the faster-than-expected rise in producer prices reported Friday underscored persistent inflation concerns.
Even if Warsh is viewed as a relative hawk compared to others on the short list, the presumption is “that he will seek to justify a dovish stance”, said Mark Dowding, the chief investment officer of RBC BlueBay Asset Management. As such, “futures markets continue to price two cuts”.
Warsh has a disdain for big balance sheets, another key issue for markets looking at how the candidate will manage the central bank’s US$6.6 trillion ($8.4 trillion) of assets. At stake is whether the central bank should keep buying Treasury bills to maintain its balance sheet at present levels or remove more liquidity from the financial system by allowing its holdings to decline.
The dollar’s rebound on Friday only pared the drop this month, which was fuelled in part by concerns about the fallout from Trump’s foreign policy and the risks of potentially meddling with the Fed. The currency slid to its lowest level since 2022 this week after Trump seemed to indicate that he welcomed a weaker dollar, though it recovered some of the loss when Treasury Secretary Scott Bessent said the US is still in favour of a strong currency.
“The dollar has been waiting for a catalyst for a recovery, and the news that Kevin Warsh is likely to be announced as the new Fed chair nominee today offers exactly that,” Francesco Pesole, a foreign exchange strategist at ING Groep NV, wrote on Friday. “It appears this could at least lower the risks of another major leg lower in the dollar for now.”
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