Morgan Stanley: Fed under Warsh's Leadership May Increase Volatility in US Treasury Market Play

Odaily Morgan Stanley stated that the Federal Reserve led by Kevin Warsh may increase volatility in the US 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 such as Hornbach and Tobias believe that this former governor prefers a "smaller balance sheet size," which could raise long-term Treasury yields relative to short-term yields, a phenomenon known as yield curve steepening.

However, the bank believes that the Fed under Warsh's leadership may change its communication approach, potentially increasing investor uncertainty, which is also a key point. This includes reduced interaction between Fed officials and the media, especially before Federal Open Market Committee meetings, and the possible elimination of the "dot plot" forecasts or the Summary of Economic Projections.

"The increased likelihood of monetary policy surprises and reduced consensus among investors regarding the future path should elevate actual volatility," Hornbach and Tobias stated.