Potential Fed Chair Kevin Warsh May Increase U.S. Treasury Market Volatility

Morgan Stanley has indicated that if Kevin Warsh assumes the role of Federal Reserve Chair, his tendency to reduce public communication could heighten volatility in the U.S. Treasury market. According to PANews, Warsh, who served as a Federal Reserve governor from 2006 to 2011, advocates for investors to independently assess economic conditions and policies rather than relying on the Federal Reserve's perspectives. Morgan Stanley's analysis suggests that Warsh might favor a smaller Federal Reserve balance sheet, potentially leading to an increase in long-term Treasury yields and a steepening of the yield curve compared to short-term yields. Additionally, he may reduce communication with the market, such as cutting back on media interactions before Federal Open Market Committee meetings and possibly eliminating tools like the "dot plot" forecasts, which could increase the likelihood of policy surprises and elevate market uncertainty. However, some investors believe Warsh may focus more on data-driven decision-making and foster consensus within the Federal Reserve. Jeffrey Palma, head of multi-asset solutions at Cohen & Steers, noted that Warsh might be more inclined to respond to changes in data compared to other recent candidates.