Investors are worried that Federal Reserve Chairman Kevin Warsh’s plan to reduce the number of interest-rate decisions each year could be a recipe for more volatility in the $32 trillion Treasury market.
Announced by Warsh after the Fed left rates unchanged at Wednesday’s policy meeting, the plan would phase in a shift to six rate decisions a year from eight, with the remaining two gatherings reserved for broader strategic discussions. The move, which would cut the number of decisions down to seven next year, is intended to give officials “time and space” for deliberations, he said.
To traders, however, it adds to a broader shift under Warsh toward a less predictable Fed, including his retreat from forward guidance — essentially telegraphing policy moves — that could increase market turbulence over time.
Bigger gaps between decisions could mean the Fed will need to occasionally deliver larger rate cuts or increases, they said. The shift also raises the likelihood of emergency action between scheduled meetings, potentially fueling bigger swings in short-dated notes and boosting the premium investors demand to hold longer-term debt.
“This is the clearest signal yet that his Fed has no interest in being a vol suppressor in rates, and is perfectly willing to add to volatility with surprise announcements if conditions warrant,” said Isaac Wheeler, managing director of balance sheet strategy at Derivative Path.