Trump picks former Fed official Warsh to run US central bank

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Trump's pick faces challenging Senate confirmation process

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Warsh's nomination follows months of public auditions, showcases

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Warsh advocates for steep rate cuts, Fed overhaul

By Ann Saphir and Susan Heavey

WASHINGTON, Jan 30 (Reuters) - President Donald Trump on Friday chose former Federal Reserve Governor Kevin Warsh to head the U.S. central bank when Jerome Powell's leadership term ends in May, giving a frequent Fed critic a chance to put his idea of monetary policy "regime change" into practice at a moment when the White House has pushed for more control over the setting of interest rates.

"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 Chairmen, maybe the best. On top of everything else, he is 'central casting, and he will never let you down," ?Trump said in announcing his latest move to put his stamp on a Fed he persistently criticizes for not caving to his demands for deep reductions in borrowing costs.

Global stocks

edged higher while the dollar rose and the price of gold plunged after Trump announced his pick of Warsh, who markets perceive as someone who would support lower rates but who would stop ?well short of the more aggressive easing associated with some of the other potential nominees.

Trump announced the nomination, which requires confirmation by the U.S. Senate, in a post on social media. No public events have been listed on the president's ?schedule for Friday involving the Fed.

The Fed has long been seen as a stabilizing force in global financial markets due in no small part to its perceived independence from politics.

Trump's escalating ?efforts to test that independence, including his Justice Department's decision earlier ?this month to open a criminal probe into Powell, have set the stage for a challenging Senate confirmation process for any successor. Republican U.S. Senator Thom Tillis has said he will not support any of Trump's Fed nominees amid the ongoing probe, while fellow Republican Senator Lisa Murkowski has called for an investigation into the department's actions.

It has ?also opened the door to the possibility that Powell, who called the criminal probe a pretext to pressure the Fed into setting monetary ?policy as the president wishes, may opt to stay on at the Fed as a governor even after his term as central bank chief is up in a bid to safeguard it from political capture. The nomination caps a months-long process that often resembled a public audition as Warsh, White House economic advisor Kevin Hassett and other top contenders - including sitting Fed governor Christopher Waller and Wall Street insider Rick Rieder - ?appeared regularly on television to tout their credentials and showcase their thoughts about the economy and Fed policy. Trump in August ?named White House economic adviser Stephen ?Miran to fill a vacant governor's seat on the Fed, where he has become a leading proponent of the aggressive rate cuts that Trump has long sought. Trump has also tried to force out Fed Governor Lisa Cook in a battle now before the Supreme Court that, if successful, would mark the first time a president has ever fired a U.S. central bank policymaker. "This nomination is the latest step in Trump's attempt to seize control ?of the Fed," Senator Elizabeth Warren, the top Democrat on the U.S. Senate Banking Committee, said in a statement citing the Powell and Cook probes. "No Republican purporting to care about Fed independence should agree to move forward with this nomination until Trump drops his witch-hunt."

Other Republican senators on the panel, however, said Warsh would be good for Fed independence.

"No one is better suited to steer the Fed and refocus our central bank on its core statutory mandate," Senator Bill Hagerty said in a social media post.

WARSH FAVORS BROAD OVERHAUL OF CENTRAL BANK

While Warsh is no White House insider, he has been a confidant of the president and a guest at the president's Florida estate, and looks poised to push many of Trump's priorities as a "shadow" Fed chief until Powell's tenure in the top job ends in mid-May.

A lawyer and distinguished visiting fellow in economics at Stanford University's Hoover Institution, Warsh has said he believes the president is right to press the central bank for steep rate cuts, and has criticized the Fed for underestimating the inflation-busting potential ?of productivity growth supercharged by artificial ?intelligence.

He has also called for a broad overhaul of the central bank that would slim its balance sheet and ease bank regulations.

Warsh, 55, was nearly named to the job in Trump's first term before being passed over for Powell, and since then has kept a steady public profile through speeches and essays that have taken Powell and his colleagues to task for their management of the Fed's balance sheet, interest rates and other actions.

He now ?will be responsible for an institution he has said should scale back its footprint in the economy and change the way it manages monetary policy. It is not clear how the pick may affect the trajectory of rates in the short term. The Fed's three rate cuts in 2025 brought its benchmark interest rate to the 3.50%-3.75% range. Earlier this week, citing stronger growth and a stabilizing labor market, it left rates on hold and signaled a pause ahead; markets for now don't expect another rate cut until the June 16-17 meeting, when Powell's successor is expected to be in place.

With a background on Wall Street, including as a partner in the office managing the wealth of investing giant Stanley Druckenmiller, and family ties to major Trump supporter Ron Lauder, Warsh will be under an intense spotlight to prove his independence from the president.

As a Fed governor from 2006 to 2011, Warsh's familiarity with Wall Street executives and investors made him a chief liaison to the financial community for then-Fed Chair Ben Bernanke during the 2007-2009 financial crisis.

Though he did not dissent against the massive bond purchases Bernanke used to nurse the economy out of what proved a ?long downturn, he was concerned they would stoke inflation and eventually resigned. Warsh's inflation concerns proved misplaced, but the large size of the Fed's balance sheet, and the role it plays in managing interest rates, remain a concern.

He now argues that shrinking the Fed's big balance sheet would allow it to "redeploy" excess liquidity in financial markets to the real economy by lowering the central bank's policy rate. In follow-up posts, Trump said he did not choose Hassett for the top Fed job because he wanted to keep him at the White House, where the adviser is doing "an outstanding job." The others who were interviewed for the job also would have been ?good choices and "have a great and unlimited future with 'TRUMP.' Such amazing talent in our Country," the president added.

(Reporting by Susan Heavey and Ann Saphir; additional reporting by Bo Erickson and Andrea Shalal; Editing by Dan Burns, Andrea Ricci, Alison Williams, Hugh Lawson and Paul Simao)