UBS: A Warsh-style Fed could bring higher rate volatility and flattening pressure on the US Treasury curve

Overview

This report discusses how, if Kevin Warsh succeeds to the Fed chairmanship, he may rely less on forward guidance and quantitative easing than in the Bernanke era, placing greater emphasis on the policy rate itself as the primary tool. UBS believes this framework shift could make medium- and long-term policy rate expectations and the term premium more unstable, leading to higher interest rate volatility and flattening pressure on the US yield curve.

Core views

The core views include: first, the gradualism and transparent communication of the Bernanke era helped stabilize medium- and long-term policy rate expectations; second, Warsh prefers the FOMC to make decisions inside the meeting room and to reduce reliance on the dot plot and rate forecasts, which could lower the market's predictability of the policy path; third, higher US policy rate expectations or a higher term premium would create a disinflationary shock to the economy; fourth, steepener trades are better suited to a dovish Fed environment with gradual rate cuts, and that may not be the future path; fifth, balance sheet reduction will take a long time, and reserve management purchases may still rise in 2027-2028.

Analysis framework

The report compares the public statements of Bernanke, Yellen, and Warsh on transparency, forward guidance, and policy tools, and combines them with the performance of US rates, the term premium, equities, and inflation indicators in the early stages of Fed chair tenures to infer the impact of potential policy framework changes on the yield curve, gold, and risk assets.

Methodology notes

• Macro Policy AnalysisFed Policy Framework Comparison

  The trade-off between forward guidance and the policy rate tool

  The report compares Bernanke's framework of gradualism, forward guidance, and quantitative easing with Warsh's framework emphasizing the policy rate and a smaller balance sheet, in order to judge the stability of market rate expectations.

• Rates StrategyUS Yield Curve Analysis

  Flattening pressure on the US 5s30s curve

  The report argues that if the market raises expectations for future policy rates or the term premium, the relative changes in long- and short-end yields could keep US 5s30s flattening, worsening the environment for steepener trades.

• Fixed Income ValuationTerm Premium Decomposition

  Adrian, Crump and Moench term premium estimate

  The chart notes cite UBS estimates based on Adrian, Crump and Moench (2013), used to decompose changes in US 2-year and 10-year yields, the S&P 500, and movements around the start of Fed chair tenures.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US Treasuries

  Directly affected by the Fed policy framework and the term premium

  Strengths

  The 30-year yield near 4.95% could attract price-sensitive buyers; rising reserve management purchases may provide some technical support.

  Weaknesses

  Higher policy rate expectations or a higher term premium could pressure bond prices and increase curve volatility.

  Comparison

  Compared with the Bernanke-style gradual and transparent framework, the Warsh-style framework may bring less forward guidance and greater uncertainty.

  Risks

  Positive surprises in inflation or growth could lead to a bearish flattening of the yield curve.

• US 5s30s curve

  Core rates strategy mapping in the report

  Strengths

  If long-end buying reappears at higher yield levels, further increases at the long end may be limited.

  Weaknesses

  Steepener trades depend on a dovish policy path with gradual rate cuts, and the report argues this may not be the future scenario.

  Comparison

  UBS has closed its US 5s30s steepener trade and continues to expect flattening pressure.

  Risks

  If the Fed shifts back toward explicit dovish forward guidance, the flattening view could be challenged.

• Gold

  Affected by real rates, the US dollar, and policy expectations

  Strengths

  If future policy uncertainty evolves into safe-haven demand, gold could gain support.

  Weaknesses

  The report notes that gold prices have already fallen about 14% after Warsh was selected as the chair nominee, showing that higher rate expectations are unfavorable for gold.

  Comparison

  Compared with US Treasuries, gold more directly reflects the tension between real rates and safe-haven sentiment.

  Risks

  If policy rate expectations continue to rise or the US dollar strengthens, gold may remain under pressure.

• US equities

  Indirectly affected through discount rates, growth expectations, and policy uncertainty

  Strengths

  If US growth remains optimistic, equity fundamentals could be supported.

  Weaknesses

  A higher term premium and greater rate volatility could compress valuations.

  Comparison

  The report's charts compare US interest rates near the start of Fed chair tenures with the performance of the S&P 500.

  Risks

  Positive surprises in growth and inflation could lead the market to scale back rate cut expectations and hit equity valuations through higher rates.

Key data

• Expected timing of Warsh taking officeAround the June 2026 FOMCUBS expects Kevin Warsh to be sworn in as Chair of the Federal Reserve Board in time.
• Change in gold priceAbout -14%Since Trump selected Kevin Warsh as the Fed chair nominee at the end of January, gold prices have fallen about 14%.
• US 30-year yield4.95%UBS believes this level could attract the return of price-sensitive buyers.
• Reserve management purchasesUSD 25 billion/month through year-end; about USD 40 billion/month in 2027; about USD 50 billion/month in 2028UBS expects the Fed's reserve management purchases to increase over the next two years.
• FOMC inflation target2%The FOMC first publicly announced a clear 2% inflation target in January 2012.
• Time required for balance sheet adjustmentPossibly more than one yearGovernor Miran emphasized that regulatory adjustments may take far more than a year to be implemented.

Impact & implications

If the Fed under Warsh reduces forward guidance and relies more on meeting-by-meeting decision-making, the market may need to reprice policy path uncertainty, and both rate volatility and the term premium may rise. For asset allocation, this means the risks of US Treasury curve flattening, pressure on gold, and equity valuation disruption from higher discount rates all need to be reassessed.

Risks

• Warsh's actual policy path may be more moderate than his public statements suggest, and short-term policy changes may be limited.
• Balance sheet reduction is constrained by the ample reserves regime and money market pressures, so execution may be slower than the market expects.
• If the Fed re-emphasizes transparent communication or forward guidance, the view of rising rate volatility could weaken.
• Geopolitics, policy shocks, declining market liquidity, and a highly volatile environment could affect multi-asset returns.
• Options, structured derivatives, futures, and mortgage-/asset-backed securities and similar instruments carry high risk and are not suitable for all investors.

What to watch

• Whether and when Kevin Warsh formally becomes Fed Chair.
• Communication changes regarding forward guidance, the dot plot, and rate forecasts at the June FOMC and subsequent meetings.
• Changes in US 2-year, 10-year, and 30-year yields and the term premium.
• Whether the US 5s30s curve continues to flatten.
• Whether the Fed's reserve management purchases rise as UBS expects to about USD 40 billion/month in 2027 and about USD 50 billion/month in 2028.
• Gold's response to real rates and policy uncertainty.
• Money market stress, bank reserves, and the pace of regulatory change.