Fed and Treasury appear at odds when it comes to the markets
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Treasury Secretary Scott Bessent and Federal Reserve chairman Kevin Warsh. Photo illustration: Sarah Grillo/Axios. Photos: Shawn Thew/EPA/Bloomberg and Al Drago/Bloomberg via Getty Images
Kevin Warsh is trying to unwind years of explicit Federal Reserve guidance. Treasury Secretary Scott Bessent may have just complicated that experiment.
Why it matters: While the Federal Reserve chairman wants to give markets more room to respond to the economy, Treasury's intervention signals that there are limits to how much market-driven movement Washington is willing to tolerate.
- The result is a contradictory policy mix: The Fed is trying to do less to guide financial markets, just as Treasury is showing a greater willingness to intervene when market moves become uncomfortable.
What they're saying: "We are in a regime where activist Treasury policy is as material — for good and for bad — as central bank policy," Krishna Guha, Evercore ISI vice chairman, wrote in a client note Thursday morning.
- "Warsh has tried to make the unconventional case that the Fed should stand back" and allow markets to determine the level of interest rates needed to restrain the economy, Guha noted.
- But "it is hard to make that case" when investors see Bessent seeking to influence long-term rates.
Driving the news: Treasury said Wednesday that it would double the size of its long-term debt buybacks, providing some relief from a sell-off that had pushed the 30-year yield to its highest level since 2007.
- In an interview with CNBC on Thursday morning, Bessent emphasized Treasury's room to do more, including increasing buybacks beyond $4 billion per issue.
- "We have a big toolkit, so we'll see," he said.
- Bessent said the intervention was partly about "signaling" that Treasury believes yields don't reflect the economy's underlying fundamentals.
Flashback: At last month's Fed press conference, Warsh said that the rise in long-term interest rates showed investors were responding more independently to the economic outlook.
- "Market participants are learning to play the ball, not the referee," he said.
- "Market prices will continue to respond in the direction and magnitude they see fit. This is, in my view, a change for the better — and we're just getting started."
By the numbers: The sell-off in long-term bonds intensified afterward, although Warsh's comments were far from the only factor.
- The 30-year yield jumped from 5.09% the day before the Fed decision to 5.21% the next morning, and kept climbing in the weeks that followed to touch the highest level since 2007.
The intrigue: The relief brought by Wednesday's Treasury move was fleeting, as economists anticipated.
- The yield on the 30-year bond was around 5.25% Thursday morning, essentially where it was before Treasury stepped in.
What to watch: While Warsh has embraced a greater role for markets in determining financial conditions, Bessent has made lowering borrowing costs a central part of the Trump administration's affordability agenda.
- That tension is clear when long-term yields jump up. What the Fed sees as a market signal translates into higher borrowing costs for households and businesses, worsening the affordability problem that administration officials are trying to address.
The bottom line: Warsh wants investors focused on the economy rather than signals from Washington, though Treasury's action gives markets a new reason to keep watching Washington.
