Morgan Stanley: Federal Reserve under Warsh's leadership may exacerbate volatility in the US bond market

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 including Hornbach and Tobias believe that this former governor prefers a "smaller balance sheet size," which could push long-term Treasury yields higher relative to short-term yields, a phenomenon known as yield curve steepening.

However, the bank believes that the Federal Reserve under Warsh's leadership may undergo changes in communication methods, 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.