The Fed announced the scheduling shift after keeping interest rates steady on Wednesday, outlining a plan to phase in the change by holding seven meetings next year before dropping to six. Traders worry the wider gaps between gatherings will require larger rate moves or unscheduled emergency steps, potentially lifting long-term yields and risk premiums. The initial reaction saw shorter-dated notes rally while longer maturities slumped, widening the yield spread between two-year and 30-year Treasuries by roughly 10 basis points.
Key points
Investors anticipate that fewer scheduled Fed decisions could force larger interest-rate…: Investors anticipate that fewer scheduled Fed decisions could force larger interest-rate moves or sudden emergency actions between official meetings.
The potential retreat from forward guidance is expected to raise the term premium investo…: The potential retreat from forward guidance is expected to raise the term premium investors require for holding long-term Treasuries.
Shorter-dated government bonds rallied immediately after the decision even as long-term m…: Shorter-dated government bonds rallied immediately after the decision even as long-term market participants braced for greater future price swings.
Sources checked by our analysis pipeline: 1
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.
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