Investors from Fidelity say new Federal Reserve Chairman Kevin Warsh stands to stoke bond-market volatility by offering his views on inflation.
Warsh’s appearance after the Fed decision on Wednesday looms as a catalyst for market swings once bond managers have digested the policy statement and summary of economic projections, according to Julian Potenza, a fixed-income portfolio manager at Fidelity Investments.
“It’s an interesting setup because while no one’s really expecting the Fed to actually do anything, there probably is some potential for volatility just because we don’t know how Warsh is going to communicate,” he said in an interview on Tuesday. “It’s not uncommon for the markets to test a new chair.”
The central bank is expected to maintain a policy range of 3.5%-3.75% and shift the statement toward a neutral setting, reversing an easing bias that has been in place since the Fed started cutting rates in 2024. Some officials, concerned about elevated inflation, are expected to signal the potential for rate hikes via the quarterly dot-plot for 2026 and possibly for 2027.
That change in expectations is borne out in the $31 trillion Treasury market that has grappled with the uncertainties of a war with Iran that sent oil prices soaring and 10-year yields climbing to above 4.4% on the eve of Warsh’s first press conference, from below 4% before the onslaught of the conflict. Over the same period, swap markets have swung from pricing rate cuts to now giving about a 80% chance of a quarter-point hike this year.
In the runup to the Fed meeting, rates volatility has dropped to lowest levels since April. Should Warsh underwhelm on dovish rhetoric and deliver a more centrist-to-hawkish tone, markets could respond by pricing in tightening financial conditions — waking up volatility just before markets head toward a summer lull.
For David DeBiase, also a fixed-income portfolio manager at Fidelity, the market is debating whether it gets “the hawkish Warsh from 10 years ago or this new, dovish Warsh.”
Any insight into how Warsh explains his inflation thinking is crucial for bond managers, he said.
“People looked at some of the quotes when he was going through the confirmation process on the trimmed mean and his disinflation ideas around AI,” DeBiase said. “I want to dig into that a little bit more and understand where he’s coming up with some of that.”
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