President Trump nominated a new Federal Reserve (Fed) Chairman who could drive faster, deeper rate cuts
President Trump has nominated Kevin Warsh, an outspoken critic of the central bank, as new Fed chairman. The White House has made no secret of its frustration with Chair Jerome Powell’s cautious approach to easing, and Warsh is likely to align more closely with President Trump’s push for deeper and swifter monetary stimulus.
For the time being, the Fed kept interest rates unchanged at 3.75% at the end of January. The dollar rallied a little at the end of last week but still suffered a 1.4% fall against the euro over the month and a 2% drop against the pound. The euro, meanwhile, fell 0.7% against the pound in January but remains 3.6% up over the last 12 months.
The Fed effect
Given the Fed’s central role in the global financial system, any shift in leadership carries significant implications. If Warsh assumes the chairmanship in May, as anticipated, the Fed could enter a prolonged period of monetary easing. Such a policy shift would likely weigh on the US dollar, potentially strengthening sterling and the euro, while increasing volatility in global exchange rates.
The other issue is of the Fed’s independence. If the Fed is seen to be acting for political rather than economic reasons, the dollar’s standing as the world’s reserve currency could be damaged. At the moment, it’s steady as she goes, but from May the situation could change rapidly.
The week ahead:
Investors will focus on US and Eurozone manufacturing PMIs (measures of business confidence) on Monday, with services PMIs following on Wednesday. Both the Bank of England and European Central Bank announce their next interest rate decisions on Thursday. Both central banks are expected to hold rates as they are – a different outcome could cause money market fluctuations.
