Fed Proposes Reducing Number of Annual Rate Decisions; Wall Street Warns Volatility in $32 Trillion U.S. Treasury Market May Intensify

Fed Chair Warsh Plans to Reduce Annual Rate Decisions from Eight to Six, Raising Wall Street Concerns About Increased Volatility in the U.S. Treasury Market Federal Reserve Chair Kevin Warsh plans to gradually reduce the number of annual rate decisions from eight to six, triggering concerns on Wall Street about heightened volatility in the U.S. Treasury market. Investors warn that as the Fed reduces the frequency of policy decisions and gradually scales back forward guidance on the future rate path, the $32 trillion U.S. Treasury market could face greater policy uncertainty, and bond yield volatility could expand accordingly. Warsh unveiled the reform plan on Wednesday after the Fed announced it would keep rates unchanged. Under the arrangement, the Fed will reduce rate decisions to seven in 2027 and then further to six per year, with the remaining two meetings primarily devoted to discussing broader strategic issues. Warsh said the move is intended to give policymakers more time and space to study major economic and monetary policy issues in greater depth. However, market participants worry that reducing the number of rate decisions could prove counterproductive, making Fed policy adjustments harder to predict. Fewer Decisions May Amplify Market Volatility; U.S. Treasury Risk Premiums Face Upward Pressure Traders noted that as the intervals between rate decision meetings lengthen, the Fed may need to take larger rate hikes or cuts at individual meetings to respond to economic changes accumulated during the interim. At the same time, if a major shock suddenly hits the economy or financial markets, the likelihood of the Fed taking emergency policy action outside scheduled meetings could also increase. These changes could not only intensify volatility in short-term U.S. Treasury yields but also prompt investors to demand higher risk compensation, thereby pushing up long-term bond yields. "This is the clearest signal yet that the Fed under Warsh has no intention of continuing to serve as a suppressor of rate market volatility. If conditions require, the Fed is fully willing to increase market volatility through surprise policy announcements," said Isaac Wheeler, Managing Director of Balance Sheet Strategy at derivatives services firm Derivative Path. Scott DiMaggio, Head of Fixed Income at AllianceBernstein, also believes that reducing the number of rate decisions could have a long-term impact on the U.S. Treasury yield curve. He noted that if Fed policy adjustments become more abrupt, the market will need to price in higher risk premiums for potentially sharp volatility in the future. "Over the long term, due to these volatility events, the yield curve will embed more risk premium." Short-Term Treasuries Rise, Long-Term Treasuries Under Pressure; Yield Curve Steepens Further Notably, the Fed's plan to reduce the number of rate decisions could have vastly different effects on U.S. Treasuries of different maturities. Traders believe that with the Fed still expected to raise rates further to curb inflation, fewer policy decisions could mean correspondingly fewer opportunities for the central bank to take tightening measures. This could reduce market expectations of further short-term rate increases, benefiting short-term U.S. Treasuries. But rising policy uncertainty could push up risk premiums on long-term bonds, leaving long-term Treasuries relatively weak. On Wednesday, after Warsh announced the reform plan and signaled a more dovish stance at the press conference, short-term U.S. Treasury prices rose and yields fell. In contrast, long-term U.S. Treasuries lagged, pushing the Treasury yield curve steeper. Data shows that since Wednesday, the yield on 30-year U.S. Treasuries has risen about 10 basis points relative to the two-year yield. This change reflects that investors, on the one hand, have lowered expectations for short-term policy rates while, on the other hand, beginning to demand higher risk compensation for long-term monetary policy uncertainty. Warsh Pushes Fed Communication Reform; Forward Guidance May Gradually Fade Reducing the number of rate decisions is only part of Warsh's push to reform the Fed's monetary policy communication framework. Since taking office as Fed Chair in May, Warsh has emphasized the need to drive fundamental changes in the central bank's policy framework and promised to bring an "institutional transformation" to the Fed. He believes the Fed's over-reliance on forward guidance may limit policymakers' ability to flexibly adjust rates in response to changing economic conditions. Warsh argues that such policy communication tools should primarily be reserved for special periods such as economic crises and should not become a regular component of monetary policy. To this end, he has established a dedicated working group to study the Fed's communication strategy, including press conference arrangements and the dot plot system that reflects officials' future rate expectations. Warsh first proposed the idea of reducing rate decisions at the Fed's July meeting this year and formally announced the adjustment plan on Wednesday. He said the new meeting schedule will allow policymakers to rethink major issues without having to discuss whether to adjust rates at every meeting. Kerry Craig, Global Market Strategist at JPMorgan Asset Management, believes Wednesday's announcement marks the Fed entering a new era of policy communication. He said this means the Fed is beginning to shift toward a model of releasing fewer advance policy signals, and more adjustments to communication mechanisms may follow. Short-Term Impact May Be Limited, but Long-Term Volatility Risk Not Yet Fully Priced In Despite investor concerns about the reform plan, the market's reaction to its short-term impact remains relatively limited. Traders noted that some measures of expected rate volatility over the next two years have barely changed, partly because the Fed has not yet disclosed all the details of the new meeting schedule. Currently, the Fed has only said that one meeting in autumn 2027 will be converted to focus specifically on strategic issues but has not specified which meeting. Traders and economists generally believe the October meeting is most likely to be adjusted, as it was not originally scheduled to include quarterly economic forecasts. Additionally, the market widely expects the Fed to end this rate-hiking cycle in a year. Overnight index swap market pricing shows that rate expectations for the September-to-December 2027 period are essentially flat. This means that even if no rate decision is scheduled in October, the direct impact on short-term market rate expectations may be relatively limited. However, investors warn that the combination of fewer rate decisions and scaled-back forward guidance could have more profound implications for the future U.S. Treasury market. "Fewer rate decision meetings, combined with the lack of forward guidance, will lead to larger repricing around each policy meeting and push rate volatility beyond what the market currently expects," said Ali Hassan, Portfolio Manager at Thornburg Investment Management. Overall, Warsh's reform aims to increase the flexibility of Fed policymaking, but it also means investors may find it harder to anticipate the central bank's policy actions in advance as they have in the past. For the $32 trillion U.S. Treasury market, the decline in Fed policy predictability could become an important factor driving up rate volatility and long-term bond risk premiums.