Futures declined in pre-market trading Friday, while bond yields and the dollar climbed, as investors positioned themselves for the potential nomination of Kevin Warsh as Federal Reserve Chair.
Deutsche Bank AG strategist Jim Reid noted in a report, issued before President Trump's confirmation, that these market movements reflect a prevailing view: "the 'Fed put' underpinning asset prices would likely weaken under Warsh's leadership."
The "Fed put" refers to the belief that the Federal Reserve will intervene with stimulative policies to halt a decline in the stock market.
Derek Halpenny of Mitsubishi UFJ suggested that the selection of Warsh over less experienced, more government-influenced rivals helps explain the dollar's rebound.
However, Halpenny stated that Warsh's credibility might make it easier for him to persuade the Federal Open Market Committee's policymakers to implement interest rate cuts.
He added that Warsh's objective of shrinking the Fed's balance sheet would likely need to be offset by rate cuts. This action would cause the yield curve to steepen, meaning the gap between long-term and short-term bond yields would widen.
Halpenny wrote in a client report, also released before Trump's formal selection, "A steeper yield curve tends to coincide with a weaker US dollar, and with the potential for rate cuts perhaps greater under a Warsh-led FOMC, we suspect this initial bounce in the dollar will fade."
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