The Federal Reserve plans to reduce the number of annual interest rate decisions; Wall Street warns that volatility in the $32 trillion U.S. Treasury market may intensify.

According to Zhihu Finance APP, Federal Reserve Chair Waller plans to gradually reduce the frequency of annual interest rate decisions from eight to six times, sparking concerns on Wall Street about increased volatility in the US Treasury market. Investors warn that as the Fed decreases the frequency of policy decisions and gradually fades out forward guidance on future rate paths, the US Treasury market—which is worth as much as $32 trillion—could face greater policy uncertainty and increased fluctuations in bond yields.

Waller announced this reform plan after the Federal Reserve kept interest rates unchanged on Wednesday. According to the plan, the Fed will cut the number of rate decisions to seven times per year in 2027, and then further reduce it to six times. The remaining two meetings will mainly focus on broader strategic issues.

Waller stated that this move is intended to give policymakers more time and space to study major economic and monetary policy issues more deeply. However, market participants worry that fewer rate decisions may backfire by making Fed policy shifts harder to predict.

Reduced Decision Frequency May Amplify Market Volatility, US Treasury Risk Premium Faces Upward Pressure

Traders point out that as the intervals between rate-setting meetings grow longer, the Fed may need to make larger hikes or cuts in single meetings to respond to economic changes accumulated during the interval. Meanwhile, if the economy or financial markets experience sudden shocks, the Fed might have to take emergency policy actions outside scheduled meetings with increased likelihood.

These changes could not only intensify short-term US Treasury yield volatility but also prompt investors to demand higher risk compensation, thereby pushing up long-term bond yields.

Isaac Wheeler, Managing Director of Balance Sheet Strategy at Derivative Path, a financial derivatives service firm, said: "This is the clearest signal yet that under Waller’s leadership, the Fed has no intention of continuing to act as a dampener of rate market volatility. If circumstances require, the Fed is fully willing to introduce more market volatility through unexpected policy announcements."

Scott DiMaggio, Head of Fixed Income at AllianceBernstein, also believes reducing the number of rate decisions may have a long-term impact on the US Treasury yield curve. He noted that if Fed policy adjustments become more abrupt, markets will have to price in a higher risk premium for potential volatility in the future. "In the long term, due to the occurrence of such volatile events, more risk premiums will be embedded in the yield curve."

Short-term Treasuries Rise, Long-term Treasuries Under Pressure, Yield Curve Steepening

It is notable that the Fed’s plan to cut the number of rate meetings may have distinctly different effects on Treasuries of various maturities. Traders believe that in the current context, where the Fed is still expected to hike to curb inflation, fewer policy meetings could mean the central bank has fewer opportunities to tighten.

This may lower market expectations of a further rise in short-term rates, which would benefit short-term US Treasuries. However, increased policy uncertainty could push up risk premiums for long-term bonds, making long-term Treasuries perform relatively weakly.

On Wednesday, after Waller announced the reform plan and signaled a dovish stance at the press conference, short-term US Treasuries rose in price with yields falling. In contrast, long-term US Treasuries lagged, further steepening the Treasury yield curve.

Data shows that since Wednesday, the yield on the 30-year US Treasury relative to the two-year note has increased by around 10 basis points. This change reflects that, on one hand, investors have lowered expectations for short-term policy rates, while on the other, they are demanding a higher risk premium for long-term monetary policy uncertainty.

Waller Promotes Fed Communication Reform, Forward Guidance Likely to Fade Out Gradually

Reducing the number of rate-setting meetings is only part of Waller’s reform of the Fed’s monetary policy communication mechanism. Since becoming Federal Reserve Chair in May, Waller has emphasized a fundamental change in the central bank's policy framework and promised to bring about an "institutional transformation" at the Fed. He argues that the Fed’s excessive reliance on forward guidance may limit policymakers’ ability to flexibly adjust rates based on changing economic conditions.

Waller advocates that policy communication tools like forward guidance should be reserved primarily for special periods such as economic crises, rather than being a key component of routine monetary policy. To this end, he has set up a dedicated task force to study the Fed’s communication strategy, including press conference arrangements and the dot plot system reflecting officials’ expectations for future rates.

Waller first raised the idea of fewer rate decisions at the July Fed meeting this year, and officially announced the relevant adjustment plan at Wednesday’s press conference. He stated that the new meeting arrangement will allow policymakers to rethink major issues without having to focus on rate adjustments at every single meeting.

Kerry Craig, Global Market Strategist at J.P. Morgan Asset Management, believes Wednesday’s announcement marks a new era in Fed policy communication. He notes that this means the Fed is starting to shift away from preemptively releasing policy signals, and further adjustments to the communication mechanism may follow in the future.

Limited Short-term Impact, but Longer-term Volatility Risks Not Fully Priced In by Markets

Although investors have expressed concerns about the reform plan, market reaction to its short-term impact remains relatively limited. Traders say some indicators that measure expected rate volatility over the next two years have barely moved, in part because the Fed has not yet laid out all the details of the new meeting arrangements.

Currently, the Fed has only said that in the fall of 2027, one meeting will be devoted to strategic issues, but has not specified which one. Traders and economists generally believe the October meeting is most likely to be changed, as it does not normally include quarterly economic forecasts.

In addition, the market currently expects that the Fed will conclude this tightening cycle in a year.

Pricing in the overnight index swap market shows that rate expectations for the period between September and December 2027 are broadly flat. This means that even if October’s meeting no longer includes a rate decision, the direct impact on short-term rate expectations may be limited.

However, investors warn that the combination of fewer rate-setting meetings and reduced forward guidance could have more far-reaching implications for the US Treasury market in the future.

Ali Hassan, portfolio manager at Thornburg Investment Management, said: “Fewer rate decision meetings, coupled with a lack of forward guidance, will lead to greater repricing before and after each policy meeting, and rate volatility may surpass current market expectations.”

Overall, Waller’s reform seeks to enhance the flexibility of Fed policymaking, but also means investors may find it harder to anticipate central bank actions in advance, as they have in the past.

For the $32 trillion US Treasury market, reduced predictability of Fed policy may become an important factor driving rate volatility and higher risk premiums for long-term bonds.