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A big bond move could be around the corner

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Here's how tax reform and the Fed chair search will impact interest rates

As rumors swirl around the possibility of a new Federal Reserve chair — and at the same time, the potential for tax reform the Trump administration has longed for — bond yields could soon see a meaningful shift.

There's much "hope" and "hype" around the prospect for lower taxes, said Max Wolff, chief economist at Disruptive Technology Advisers, though it is likely that a much smaller package than what was proposed will emerge.

"We're afraid that interest rates will be affected as people realize that some of what they had hoped for to keep the economy up won't be delivered," Wolff said Wednesday on CNBC's "Trading Nation."

Meanwhile, former Fed governor Kevin Warsh is seen as a front-runner for the Fed chair position, as current Fed Chair Janet Yellen's term is set to expire early next year. A potential Warsh appointment is widely seen as likely ushering in more hawkish Fed policy and higher interest rates.

Indeed, bond yields rose a bit on news media reports that Warsh was meeting with President Donald Trump.

Yet despite Warsh's hawkish rhetoric, Wolff said that "his voting record tells a different story."

"The reason that causes concern is that we have opinions in one direction and facts in another, and that has to resolve itself. When it does, things tend to get choppy. When they get choppy for interest rates, we pay attention, because it really matters," he said.

Online political prediction market platform PredictIt on Wednesday reflected a 42 percent probability that Warsh will become Fed chair in February.

In a report on Wednesday, Bank of America Merrill Lynch chief economist Michelle Meyer wrote that Warsh would "lean more hawkish on monetary policy but easier on regulation." Fed Gov. Jerome Powell, also seen as a contender for the post, "would maintain similar ideals as Yellen," she wrote.

"We should expect clarity on the nominee in the next 2 to 3 weeks. Also look out for names to be floated for the Vice Chair," Meyer wrote.