After intervention from the US Treasury to cap bond yields, the ball is now over to the Fed’s court. It is not your typical approach in handling things as Bessent has essentially now blurred the lines on debt management and monetary policy i.e. interest rate control. In essence, one can even argue that what Bessent did is “shadow monetary policy” disguised as a liquidity management operation.
To say that Treasuries are at a point that are “oversold”, requiring such intervention may be a bit of a stretch in all honesty. Let’s call a spade, a spade. This is very much a “price management” move by Bessent rather than a “liquidity management” one per se.
The US administration is not happy with where yields are going and this is their way to try and put a stop that.
In one aspect at least, it saves the Fed from the pain of having to balance walking on a very, very narrow tightrope. After all, the Fed has an inflation mandate to adhere to while the Treasury doesn’t.
So the question now is, will Warsh allow Bessent to take the reins for a while in pushing the latest narrative? Or will he have something to say tomorrow at Jackson Hole?
I reckon he will just double down and say that Bessent is doing what he is doing as needed based on the “liquidity issues” he sees with the bond market. And as for the Fed, they will stick to their lane and focus on monetary policy instead. That should roughly summarise what Warsh should be saying in my view.
There’s a good debate and argument that if Bessent artificially suppresses long-term yields while inflation remains sticky, it pretty much counteracts the Fed’s intent to keep conditions sufficiently restrictive. At the same time, these buybacks also challenge the narrative by Warsh in wanting to force more fiscal discipline. And also, it pretty much pushes against what Warsh tried to advocate for previously i.e. reduced forward guidance and letting markets take on the responsibility of price discovery/setting.
On that final point, perhaps Bessent’s move can be deemed as a “helping hand”. But either way, I can’t imagine Warsh wanting to stir up more conflict at this stage.
They are both appointed by Trump at the end of the day and there has to be a bigger play here. And in trying to stick to that, we are likely to see the Fed let Bessent bask in the spotlight for now while they quietly go about their business in keeping interest rates as it is. That as inflation pressures continue to be the main concern.
This article was written by Justin Low at investinglive.com.