Morgan Stanley: Warsh's Fed may exacerbate volatility in the US Treasury market.

Morgan Stanley says a Federal Reserve led by Kevin Warsh could exacerbate volatility in the U.S. Treasury market due to reduced public policy communication. Since Warsh's nomination, traders have focused primarily on his stance on the size of the Fed's balance sheet or the appropriate level of policy rates. At Morgan Stanley, Hornbach and Tobias, among others, believe the former governor prefers a "smaller balance sheet," which could push up the yield curve relative to long-term Treasury yields. However, the bank believes a shift in communication style under Warsh's leadership could exacerbate investor uncertainty, which is key. This includes reduced interaction between Fed officials and the media, especially before FOMC meetings, and the potential cancellation of the "dot plot" or summary of economic projections. "The greater likelihood of surprises in monetary policy, and the reduced consensus among investors on the future path, should push up real volatility," Hornbach and Tobias said.