Warsh’s Opening Act at the Fed

Summary

Morgan Stanley strategists preview the first FOMC meeting under new Fed Chair Warsh, focusing on likely changes to the policy statement and communication strategy. They discuss how a shift to neutral forward guidance could open the door to rate hikes, and how less Fed communication may impact bond markets, particularly by raising term premium and increasing volatility.

• The FOMC is expected to replace its easing bias with neutral language, signaling possible rate hikes.
• New Chair Warsh favors less forward guidance, which could reduce the Fed's control over market narratives.
• The balance of risks has tilted toward firmer inflation, supporting the case for future tightening.
• Less communication is likely to initially raise term premia, steepening the yield curve and pressuring long-end bonds.
• Term premium may become more volatile over time, not just unidirectionally higher.
• A potential move to quarterly press conferences could lower rate-hike expectations in the short end.