With the race for Fed chair believed to be down to two key candidates, many in the markets expect President Donald Trump to go with the safe pick — Fed Gov. Jerome Powell.
Politico reported that Powell is being pushed by Treasury Secretary Steven Mnuchin over Kevin Warsh, a former Fed governor who has been outspoken about easy Fed policy in recent years. Mnuchin has been involved in the process to find a replacement for Fed Chair Janet Yellen, whose term ends early next year.
"To me, Powell makes the most sense. But we have to consider who is making the decision. Powell represents a change but with some continuity," said Ward McCarthy, chief financial economist at Jefferies. "He's an impressive guy, and he has experience both in the private sector and at the Fed and that's important."
Trump is expected to make the decision in the next couple of weeks, and market speculation has swung between the two individuals, with Warsh believed to be the favorite just a week ago. In the PredictIt probabilities market, Powell's odds were at 48 percent Wednesday compared with Warsh, at 28 percent.
Strategists believe either candidate would be more hawkish than Yellen, who was also believed to be a possibility at one point. But Warsh is seen as much more hawkish, and some market pros expect he may push the Fed to unwind its balance sheet even faster or raise rates more quickly.
"I don't know if rates will rise or the stock market will get crushed. His big thing is he wants to shrink the balance sheet more aggressively than anyone else at the Fed," said McCarthy.
Some strategists say that if he is nominated yields would move higher. The stock market could react negatively if the move higher in Treasury yields is too swift.
"Powell is more predictable. Kevin Warsh is more of a disruptor, and unfortunately you've got this push and pull," said Art Hogan, chief investment strategist at Wunderlich Securities. "When Trump ran for office, he had the populist notion that he was going to play to the people that hate the Fed, and he has to shake things up in Washington."
Warsh could be that person, Hogan said. "But the market would look at this and say, we're in a precarious position," he added. "We probably need a calmer hand on the tiller. You look at Powell and say, been there, done that."
Hogan noted that Trump has said he likes low interest rates, and while both would push rate hikes, Warsh might push a faster course than the Fed has been on.
Both Powell and Warsh are seen to favor deregulation of the financial sector more than Yellen, but Warsh is seen as someone who may move quickly to undo some of the regulation that has been put in place post-financial crisis.
Rick Rieder, global chief investment officer, fixed income at BlackRock, said there may not be the extreme differences between the two that some in the markets expect.
"The Fed is different than an elected official in that they tend to follow through on a plan," Rieder said. "I think the institution of the Fed tends to carry consistency with it."
Rieder said it will be a positive for markets when Trump makes his choice known.
"I think it would be great from the market perspective if they can make the decision, and we can move on," he said. "I think you'll see a headline move on the view that [Warsh's] prior commentary was more hawkish on the balance sheet and policy, but the Fed has already started the move."
Rieder said he expects the Fed to stay on the path to reduce the balance sheet that it laid out. He expects the Fed to also continue on its forecast rate hiking path, with the next interest rate increase coming in December.
He said if Warsh is nominated, the bond market may sell off more on the long end than with Powell. "But I don't think the move will be that dramatic.