Treasury Secretary Scott Bessent's push to influence Treasury yields is putting pressure on Federal Reserve Chairman Kevin Warsh to spell out where the Fed's independence ends and Treasury's authority begins. The question could come to a head at the Fed's Jackson Hole symposium later this month.
Bessent cannot bring down Treasury yields on his own — doing so would eventually require coordination with Warsh, his longtime friend now leading the Fed. That dependence is adding scrutiny on Warsh to clarify his stance on Fed independence and on the Fed's attitude toward the government's debt pile.
The Fed has historically stepped into the bond market only during severe economic weakness or clear emergencies, and there is no sign it plans to act now. But Warsh has said repeatedly he believes the Fed should hand more authority to the Treasury over decisions involving its balance sheet, and there is no firm line between where Treasury's role ends and the Fed's begins.
Treasury expands its buyback plan
The Treasury Department announced Wednesday it would buy back at least $2 billion of long-dated Treasuries beyond its existing plans, offset by shorter-maturity debt. Bessent suggested more could follow, telling CNBC Thursday that Treasury has a big toolkit and will see how things develop.
Bessent said part of the goal is signaling that current yields don't reflect the underlying fundamentals. The 10-year Treasury yield dropped Wednesday but had already unwound most of those gains by Thursday.
Warsh's balance-sheet plans cut against Bessent
Warsh has proposed updating the 1951 Treasury-Fed Accord to give Treasury more authority over major adjustments to the Fed's $6.7 trillion balance sheet. Yet his existing plans point the other way: he wants the Fed to shrink its holdings and shift them toward short-term debt, which would likely push longer-term yields higher — the opposite of what Bessent wants.
The Fed itself remains divided on the question. Minutes from the FOMC's July meeting showed officials deferred balance-sheet decisions until a Warsh-appointed task force reports back, expected late this year or early next.
Markets await clarity at Jackson Hole
Warsh's remarks after the July FOMC meeting left some in the market with the impression that he welcomed a rise in long-term bond yields. Bond traders raised yields further to account for the resulting uncertainty, according to former Cleveland Fed president Loretta Mester. At his April Senate confirmation hearing, Warsh said "Fed independence is at its peak in the conduct of monetary policy", a formulation that leaves room for other Fed functions, such as bank supervision, to be less independent.
Bessent said Thursday he expects the Treasury and the Fed to keep working together on any balance-sheet changes. Neither the Fed nor the Treasury responded to questions about whether that coordination has already begun.
Source: CNBC
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