According to Kay Haigh of Goldman Sachs Asset Management, the initial remarks made by Kevin Warsh following his first policy decision as Federal Reserve Chair are likely to induce greater volatility at the short end of the US Treasury yield curve, while simultaneously dampening price fluctuations at the longer end.
Haigh, who serves as the Global Head of Fixed Income and Liquidity Solutions and Chief Investment Officer within Goldman Sachs Group's asset management division, stated that Warsh's "unambiguously hawkish" stance surprised the market, as it clearly prioritizes combating inflation in the near term. Traders quickly increased bets that policymakers will raise interest rates sooner than previously anticipated.
Data indicates that investors now perceive the probability of a rate hike at the Federal Open Market Committee's September meeting to exceed 80%, with expectations now factoring in more than one hike by the October meeting. As recently as Tuesday, traders did not anticipate a potential hike until December.
Haigh commented on Thursday, "We are going to see a lot more volatility in that two-year sector going forward." He explained this is primarily due to the Fed's intense focus on inflation, which is expected to lead to a stabilization and flattening of the longer end of the yield curve. Secondly, he noted there is significant commentary surrounding forward guidance, suggesting it will be reduced, making the Fed more data-dependent, with much of this translating into volatility in the two-year sector.
Haigh added that Warsh's explicit commitment to returning inflation to the Fed's 2% target, combined with the potential effects of his new communication style—which may be reinforced by the establishment of five working groups—could solidify this trend. These groups are tasked with reviewing various matters, ranging from the Fed's economic projections to the execution of its policies.
Haigh stated that, taken together, these factors may help reduce price volatility at the long end of the yield curve.
These working groups "are clearly set up to re-examine how the Fed operates," Haigh said. "We need to see how this ultimately plays out, but it is likely to translate into lower volatility at the long end. In our view, this would significantly enhance its appeal to investors."
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