Morgan Stanley: Under Waller's leadership, the Federal Reserve may "speak less," and U.S. bond market volatility will increase

Morgan Stanley stated that the Federal Reserve led by Kevin. Woorsh may increase volatility in the US Treasury market due to reduced communication from the central bank. The firm’s strategists Matthew. Hornbach and Martin. Tobias wrote in a report on January 30, “Woorsh does not like markets to overly rely on the Fed’s views. If the market’s perception differs from his judgment, he may not reinforce the market’s stance.”

Last week, US President Trump nominated Woorsh as the next Federal Reserve Chair to succeed Powell, whose term ends in May. Woorsh previously served as a Federal Reserve Board member from 2006 to 2011. A review of the FOMC meeting minutes from that time shows that Woorsh preferred investors to form their own judgments about economic growth, inflation, and monetary policy.

Over the past year, although the absolute levels of US Treasury yields fluctuated with changes in economic growth, labor markets, and inflation, the market’s reaction to interest rate changes has significantly decreased. This is largely due to the predictability of the Fed’s policy path and its clear external communication.

Fed Chair Powell last October stated that monetary policy would be “more effective” when the “public understands what the Fed is doing and why.” The Fed kept interest rates unchanged last month. Traders generally believe that the Fed will not adjust the benchmark borrowing costs again until at least July.

Since Woorsh’s nomination, traders have mainly focused on his stance regarding the size of the Fed’s balance sheet and the appropriate policy interest rate level. Morgan Stanley sees that this former Fed official prefers a “smaller balance sheet footprint,” which would push long-term Treasury yields higher relative to short-term yields, steepening the US yield curve.

However, Morgan Stanley also considers that potential changes in the Fed’s communication style under Woorsh’s leadership, and the resulting increased investor uncertainty, are key factors. These changes could include: fewer interactions between Fed officials and the media, especially before FOMC meetings; and the cancellation of dot plots or the Summary of Economic Projections. Hornbach and Tobias stated, “An increase in unexpected monetary policy moves and a reduced consensus among investors about future policy paths should raise actual volatility.”

Markets Live strategist Tatyana. Darye noted that Woorsh’s skepticism towards “data dependence, forward guidance, or frequent Fed communication” could increase market volatility. However, for now, as seen after Treasury Secretary nominations by Trump, the market has temporarily eased due to Trump choosing a more traditional candidate than previously expected.

Nevertheless, not all investors believe that a Fed led by Woorsh necessarily means increased Treasury market volatility. One reason is that, compared to other candidates Trump considered earlier, Woorsh may be more willing to promote coordination among Fed officials.

Jeffrey. Palma, head of multi-asset solutions at Cohen & Steers, which manages over $90 billion in assets, said, “Woorsh may be the most likely candidate among recent contenders to rebuild consensus to some extent. He is more likely to respond to data and stay flexible rather than being overly ideological.”