The new Fed Chair's plan to reduce "forward guidance" removes a source of market certainty. Without explicit signaling about future policy, every new economic data point will have a greater potential to shift market sentiment, leading to higher volatility even if the Fed takes no action on rates.
Despite the Federal Reserve signaling rate hikes due to high inflation forecasts, Morgan Stanley's economists predict lower inflation for the year. This contrarian view is based on the recent significant drop in energy prices, which reduces a core inflationary pressure and may lead the Fed to remain on hold.
The UK provides a real-world example of how policy inaction doesn't guarantee stability. Despite the Bank of England holding its target rate steady for over six months, the UK two-year bond yield has fluctuated within a wide 100 basis point range, showing what could happen in the U.S.