If Treasury Secretary Scott Bessent really wants the full power of the federal government to deal with what he sees as fraudulent bond markets, he can’t act alone. A sustained effort to lower Treasury yields will ultimately require coordination with Mr. Bessent’s longtime friend, Kevin Warsh, the current Federal Reserve chairman.
Mr. Bessent’s efforts to influence the bond markets will likely put Mr. Warsh under even more scrutiny as it reveals his stance on Fed independence and the massive U.S. government debt.
The Fed has traditionally intervened in bond markets to influence yields only during severe economic downturns or obvious emergencies. The concerns Bessent has expressed so far fall below that threshold, and there is no indication the central bank intends to get involved at this point. But there is no clear line between where the Treasury’s responsibilities end and the Fed’s responsibilities begin, and Mr. Warsh has repeatedly said he believes the Fed should delegate more authority to the Treasury on sensitive issues related to the Fed’s balance sheet.
The Treasury Department announced Wednesday that it would buy back at least $2 billion worth of long-term bonds, in addition to its existing program. This will need to be offset by debt with short maturities.
Bessent suggested there may be more planned. “We have a big toolkit, so we’ll see,” Bessent said Thursday on CNBC.
“Part of it is a signal here to show that we believe yields are not reflecting the underlying fundamentals,” Bessent said. yield 10 year treasury Notes fell on Wednesday, but most of that gain had already been erased by Thursday.
10 year government bond, 5 days
“There is more power in terms of how the Federal Reserve manages the yield curve,” Rick Rieder, chief investment officer of global fixed income, told CNBC on Wednesday.
“We’re going to Jackson Hole, and it’s going to be interesting to see how they handle it,” Reeder said.
Mr. Warsh was already facing questions about his relationship with the U.S. Treasury market in the lead-up to the Jackson Hole Economic Policy Symposium, an annual gathering of central bankers in the Wyoming Mountains in late August.
Warsh’s comments after the FOMC meeting in July gave some in the market the impression that he welcomed the rise in long-term bond yields.
Loretta Mester, former president of the Cleveland Fed, said bond traders took this uncertainty into account and pushed yields higher.
“I think part of what’s going on is that it’s still not very clear what Kevin Warsh’s plans are,” Mester said in an interview with CNBC. “Even their response functions are not clear.”
Mr. Warsh said in July that he was concerned about inflation, but did not directly answer a reporter’s question about what it would take to raise interest rates to address it.
Fed independence
Mr. Warsh was also vague about the precise limits of the Fed’s authority over certain aspects of the financial system.
“The Fed’s independence in conducting monetary policy has reached its peak,” Warsh said at his Senate confirmation hearing in April. This nuanced view suggests that some aspects of the Fed’s operations are not completely independent. Warsh cited banking supervision as an example of non-independence policy, but was not entirely clear about what would and would not be included.
Separately, Warsh said he wants the Fed to rewrite its relationship with the Treasury Department. He proposed renewing the 1951 Treasury and Fed Agreement in 2025, establishing a modern basis for sharing responsibilities between the two institutions and ensuring the Fed’s political independence. As part of the amended deal, Mr. Warsh wanted to give the Treasury Department more power to make major adjustments to the Fed’s massive balance sheet.
“Given this partially disguised fiscal policy, the Secretary of the Treasury will need to determine that the proposed changes to the Fed’s holdings are acceptable,” Warsh said of 2025.
The success or failure of Mr. Bessent’s plan could depend on how the Fed views the $6.7 trillion in financial assets it currently has on its balance sheet. Mr. Warsh’s existing plan appears to run counter to Mr. Bessent’s hopes of containing yields. Mr. Warsh wants the Fed to reduce its overall holdings and put them into short-term Treasuries, which would likely push up long-term Treasury yields, the opposite of what Mr. Bessent wants to accomplish.
But even on this issue, the Fed’s opinion is divided. Recently released minutes of the Federal Open Market Committee’s July meeting show that the Fed deferred questions about the balance sheet until the return of the task force Mr. Warsh assigned to report on the issue. It will be late this year or early next year.
Historically, the Treasury and the Fed have actually communicated with each other regarding major changes to the balance sheet. Bessent suggested in an interview with CNBC on Thursday that it will continue.
“I think the Treasury and the Fed will work together if there are any changes to the balance sheet, and they will respond to any type of outflows that they’re doing,” Bessent said.
Neither the Fed nor the Treasury Department responded to emailed questions about whether Mr. Bessent’s comments suggested that he and Mr. Warsh had begun coordinating.
