"The Fed's mouthpiece": History repeats itself; when facing war, Bessant tests the "boundaries between the Fed and the Treasury."

On August 27, The Wall Street Journal published an in-depth report written by Nick Timiraos, a veteran reporter known as the "Federal Reserve's mouthpiece."

The timing of the report is quite delicate—it comes just before the Kansas City Fed’s annual economic policy symposium (Jackson Hole Central Bank Conference), with Fed Chairman Kevin Warsh about to speak, and a series of actions by US Treasury Secretary Bessant becoming one of the hottest topics of discussion among participating central bank officials.

The article asks: How far has Bessant gone? Have his bond market operations, his attention to Federal Reserve personnel, and his public statements on monetary policy crossed the historically defined boundary between the Treasury and the Federal Reserve?

This border did not exist naturally. It was born in 1951, born from a war, and today, the echoes of history resound once again.

A single announcement stirred up the market.

Last week, Bessant announced that the Treasury would at least double the amount of long-term Treasury bonds it would buy back.

The timing of this announcement is particularly noteworthy—it comes just two weeks after the Treasury Department's last quarterly press conference, where such policy adjustments are typically announced. The Treasury has long pledged to investors that debt management will be "regular and predictable," rather than opportunistic.

Bessant's reasoning was that current long-term government bond yields have reached 19-year highs and "do not reflect fundamentals." His goal is to lower long-term yields and reduce government financing costs by expanding repurchase agreements.

Nick Timiraos argues that the problem lies in the fact that this is happening precisely at a time when the Federal Reserve might want to tighten financial conditions. If the Treasury's actions successfully lower long-term interest rates, it would be tantamount to prematurely opening the "valve" of monetary policy before the Fed has even taken any action .

Stanley Druckenmiller , a well-known investor and Bessant's former mentor, wrote an article this week criticizing the buyback program as "price management" and calling it "a mistake."

Bessant's "Multi-pronged Approach"

Bond buybacks are just one part of Bessen's recent actions.

Nick Timiraos wrote that earlier this month he pressured the Federal Reserve to provide more dollar liquidity to foreign central banks in order to support Japan's intervention in the foreign exchange market and to support the yen without selling off U.S. Treasuries—because a large-scale sell-off of U.S. Treasuries by Japan would directly push up U.S. Treasury yields.

At the same time, Bessant also expressed interest in a nominee for president of the Atlanta Federal Reserve , a position that has been vacant since March of this year.

Earlier, the Trump administration had also instructed government-owned Fannie Mae and Freddie Mac to increase their purchases of mortgage-backed securities in order to lower mortgage rates.

This series of actions has led to questions about whether the Treasury Department is systematically seeking various levers to bypass the Federal Reserve and directly influence market interest rates.

"This is real trouble for Walsh."

In his article, Nick Timiraos quoted Jon Faust , who served as an advisor to the last three Federal Reserve chairmen, as saying:

Bessant's words and actions were a real problem for Warsh. The concern already existed that monetary policy might be subservient to government financing needs amid high inflation. And for him to do this on the eve of Jackson Hole was, in my opinion, quite inconsiderate, even a slap in the face.

The advisor also pointed out that there was already significant division within the Federal Reserve's interest rate decision-making committee (FOMC) —three officials voted to raise interest rates last month. If Bessant's intervention in the bond market successfully lowers long-term interest rates and borrowing costs, "this will certainly push the majority of the FOMC to further favor raising interest rates."

The Treasury Department refuted this claim. A Treasury spokesperson stated, "Prior to the global financial crisis, debt management decisions were made entirely by the Treasury Department. Under Secretary Bessant's leadership, the Treasury is reclaiming these powers to fulfill its mission—financing American taxpayers at the lowest possible long-term cost."

Bessant himself also stated that debt buybacks "will not interfere with monetary policy," and that the Treasury and the Federal Reserve "will cooperate if there are any changes to the balance sheet."

Walsh's dilemma

This controversy is particularly difficult for Federal Reserve Chairman Warsh.

Nick Timiraos noted that since taking office, Warsh has consistently emphasized that the Federal Reserve should "talk less" about future policy directions in order to obtain "unfiltered, true signals" from market prices. Last month, he also specifically cited rising Treasury yields as evidence that the bond market is spontaneously tightening financial conditions.

However, the current trends in these yields may now reflect Treasury intervention rather than purely investors' assessments of the economic outlook. This makes the "thermometer" that Warsh relied on to observe the market less reliable.

MIT professor and former European Central Bank official Athanasios Orphanides takes a relatively moderate stance. He stated that the Treasury has the right to manage debt as it deems appropriate, and the Federal Reserve's responsibility is not to question these policies, but rather to incorporate their economic impact into its interest rate decisions.

Minneapolis Federal Reserve President Neal Kashkari said in a television interview this week that he sees no signs that the recent bond market sell-off has made the Fed's job more difficult, and that the Treasury market is "functioning normally."

Echoes of History: From 1951 to Today

The boundaries between the Treasury and the Federal Reserve have not always been clear.

Nick Timiraos stated that during World War II , the Federal Reserve agreed to lower Treasury yields to help the government finance the war. This arrangement was not terminated until 1951 with the signing of an agreement—at which time, the two sides were arguing over how to pay for the Korean War. That agreement is now considered the starting point for the Federal Reserve's independence.

The war also gave rise to another famous historical scene: In 1965 , President Lyndon Johnson summoned then Federal Reserve Chairman William McChesney Martin to his ranch in Texas to reprimand him in person for his decision to raise interest rates during the Vietnam War.

Last year, Walsh spoke of writing an "updated version of the 1951 agreement." Today, he faces a new wave of inflationary pressures triggered by another war, while Bessant is leading economic diplomacy aimed at ending it.

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