Morgan Stanley: Fed Under Warsh Could Intensify Volatility in U.S. Treasury Market Play

Odaily Morgan Stanley stated that a Federal Reserve led by Kevin Warsh might increase volatility in the U.S. Treasury market due to reduced public communication of its policies. Since Warsh's nomination, traders have primarily focused on his stance regarding the appropriate size of the Fed's balance sheet or policy interest rates. At Morgan Stanley, analysts including Hornbach and Tobias believe that this former governor's preference for a "smaller balance sheet size" could push long-term Treasury yields higher relative to short-term yields, a phenomenon known as a steepening yield curve.

However, the bank argues that the key point is that the Fed under Warsh might change its communication approach, potentially heightening investor uncertainty. This includes reduced interactions between Fed officials and the media, especially ahead of Federal Open Market Committee meetings, and the possible elimination of the "dot plot" forecasts or the Summary of Economic Projections.

"The potential for more monetary policy surprises and less investor consensus on the future path should push realized volatility higher," said Hornbach and Tobias.