Powell's decision on Fed board seat could shape Warsh's leadership

* Powell undecided on remaining Fed governor amid Trump administration probe

* Republican senators, notably Tillis, want probe shut down

* Powell's decision could sway central bank policy, reforms

By Howard Schneider

WASHINGTON, March 20 (Reuters) - Federal Reserve Chair Jerome Powell's upcoming decision on whether to keep his seat on the U.S. central bank's Board of Governors after his leadership term ends is now a key factor in how the tenure of his would-be successor Kevin Warsh evolves, and whether President Donald Trump and Treasury Secretary Scott Bessent can pursue any overhaul of the Fed's structure, operations and monetary policy. Powell spoke directly to the issue on Wednesday for the first time, saying he would not leave the Fed at least until a criminal investigation spearheaded by U.S. Attorney Jeanine Pirro is "well and truly over with transparency and finality," and that he had not yet decided whether to remain even longer in a governor's seat that lasts until 2028 - well into Warsh's potential leadership of the central bank. Some analysts still feel it is unlikely the Fed will end up with "two popes" - a reference to a medieval schism in the Catholic Church - and feel the current back and forth between Powell and the Republican senators who back him, and Pirro and the Trump administration will end with the investigation closed, Warsh confirmed as the head of the central bank by the U.S. Senate, and Powell retiring. With key Republicans like North Carolina Senator Thom Tillis and others saying they will not confirm Warsh until Pirro stands down on her probe, Powell's necessary condition for leaving will likely be met before a new Fed chief arrives, said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a political history of the Fed. "If the legal issues are resolved and Tillis stands down, (and) Kevin is confirmed, I believe Jay will retire," Spindel said. "I think he would be respectful of the incoming chair" once the Pirro probe is ended, with the confirmation delay engineered by Tillis and others serving to both defend Powell and spare Warsh the difficult position of taking over an organization with a former, well-regarded leader still at the table. Whether Powell, whose term as Fed chief ends in May, would remain at the central bank even longer is a separate issue. Other threats to the central bank are still in motion, including Trump's effort to fire Fed Governor Lisa Cook, which is pending before the U.S. Supreme Court, and Bessent's comments about issues like imposing residency requirements for the Fed's regional bank presidents, and Powell might want to see those resolved before leaving his seat and opening it for Trump to appoint another governor to the seven-member board.

NO MODERN-DAY TEMPLATE Powell, speaking to reporters on Wednesday after the Fed held interest rates steady for the second time this year, said he would decide whether to remain on the board "based on what I think is best for the institution and for the people we serve," a stance that could still put Warsh and the central bank in uncharted territory and open the question of what role Powell would play and for how long.

LH Meyer analyst Derek Tang, in two lengthy notes on the issue, said that for now Powell's "source of leverage ... lies more in not having decided yet, to induce better behavior from Trump." If there seem to be real threats to the Fed even as Warsh takes over, Tang said Powell might logically stay on until after the U.S. midterm elections in November, the results of which could shift the balance of power in Congress, or beyond that time if risks to the Fed's independence continue until his term as governor ends in 2028, the final year of Trump's presidency.

It would be a gamble - other Fed governors might leave, for example, providing the administration with new openings to fill and increased influence regardless of Powell's presence. Without a modern-day template for the role Powell would be taking on as an ex-Fed chief, there also would be risks that he is seen as acting politically to defend the Fed's independence from politics, a tricky needle to thread. Powell remaining "is confrontational ... to the new chair and to the White House and to the Senate who confirmed the new chair. Powell staying is basically the old guard announcing they're going to the mattresses," said Vincent Reinhart, chief economist at BNY Investments and a former head of the Fed's monetary affairs division. The only similar situation occurred in the 1950s when outgoing Fed Chair Marriner Eccles was asked to stay on the board by President Harry Truman to help with post-war economic management. That dynamic was different, Reinhart said. The unwritten rule of Fed chiefs leaving their governors' seats is in part out of respect for the design of the institution. While the Fed is meant to be independent of political influence in setting interest rates, it is not meant to be independent of election results - with the four-year terms for the top Fed official aligned with presidential election cycles, allowing each new president to name a Fed chief. Fed governors' terms run on a separate 14-year timetable to insulate them from political concerns. Christopher Hodge, chief U.S. economist at investment bank Natixis CIB, said a decision by Powell to remain as a governor could "be a beneficial counterpoint if the Fed was being unduly influenced by political factors. ... The administration has shown they're going to try whatever tools are at hand" to influence the central bank, an approach that won't necessarily abate under Warsh.

But Hodge added that he felt the institutional guard rails would hold, and that Warsh, once installed as Fed chief, "is going to be looking at how history views him."

Once confirmed by the Senate, "he's outside the political touch of the president. He is going to use that independence to implement policy how he sees fit," Hodge said. (Reporting by Howard Schneider; Editing by Paul Simao)