US Federal Reserve Chairman Kevin Warsh’s proposal to reduce the number of interest rate decisions each year has sparked concerns about increased volatility in the US$32 trillion Treasury market. Announced after the Fed’s October 28 policy meeting, the plan aims to cut the number of rate decisions from eight to six annually, with the remaining two meetings reserved for strategic discussions. The shift, which begins next year, is intended to provide officials with more time for deliberations.
Traders worry that fewer decisions could lead to larger rate adjustments and more unpredictable market movements. The absence of forward guidance, where the Fed signals upcoming policy moves, could further exacerbate volatility. Isaac Wheeler, managing director of balance sheet strategy at Derivative Path, noted that this signals a Fed willing to embrace volatility with surprise announcements if necessary.
The change may also limit the Fed’s ability to tighten monetary policy in the current cycle, which is focused on combating inflation. While shorter-term yields could benefit, longer-term rates might rise due to policy uncertainty. The announcement, coupled with Warsh’s dovish tone, drove a rally in shorter-dated Treasuries on October 28, steepening the yield curve as thirty-year yields rose about 10 basis points relative to two-year yields.
Warsh has advocated for reducing forward guidance, suggesting it restricts the Fed’s flexibility. He has promised a ‘regime change’ since taking office in May, including a review of the central bank’s communication strategy. The October meeting is the most likely candidate to be converted into a strategy discussion, though details remain scarce. Investors caution that fewer decisions combined with less guidance could lead to more significant repricing and volatility around each meeting.