Morgan Stanley: The Fed under Walsh may intensify volatility in the U.S. Treasury market

Morgan Stanley stated that if Kevin Warsh takes over as Chairman of the Federal Reserve, his tendency to reduce public communication may exacerbate volatility in the U.S. Treasury market.

Warsh served as a Federal Reserve governor from 2006 to 2011 and advocated for investors to make their own judgments about the economy and policy, rather than relying on the Fed's views. Morgan Stanley's analysis pointed out that Warsh may prefer a smaller Federal Reserve balance sheet, which could lead to an increase in long-term Treasury yields, creating a steeper 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 may even eliminate tools like the "dot plot" forecast, which would increase the likelihood of policy surprises and raise market uncertainty. However, some investors believe that Warsh may focus more on data-driven decision-making, which could foster consensus within the Federal Reserve. Jeffrey Palma, head of multi-asset solutions at Cohen & Steers, stated that Warsh might be one of the recent candidates more inclined to respond to data changes.