"The New Fed's Newsletter": Bessett's Frequent Interventions Test the Fed's Independence

Nick Timiraos, a reporter for The Wall Street Journal hailed as the "new Fed's mouthpiece," recently wrote that U.S. Treasury Secretary Bessant is gradually intervening in policy areas traditionally belonging to the Federal Reserve through a series of measures, making the issue of central bank independence a focus of the market once again.

Last week, Bessant abruptly announced a significant expansion of the government's repurchase program for long-term Treasury bonds, aiming to lower long-term yields, which had risen to a 19-year high. This move comes just as the Federal Reserve may be looking to tighten financial conditions, pushing yields down and potentially creating a conflict with the direction of monetary policy.

At the same time, Bessant had previously pressured the Federal Reserve to provide more dollar liquidity to foreign central banks and expressed interest in the nominee for the Atlanta Fed presidency, a position that has been vacant since March of this year.

These developments have put Federal Reserve Chairman Warsh in a delicate position as he prepares to appear at the Jackson Hole Economic Symposium, and central bank officials from around the world are expected to discuss the topic extensively on the sidelines of the meeting.

Against the backdrop of high inflation and existing internal disagreements on interest rate policy, if the Ministry of Finance's debt management operations continue to send signals to the market that contradict monetary policy, it may further blur the functional boundaries between the central bank and the administrative authorities.

The sudden debt buyback has raised questions about its timing.

Last week, Bessant announced that the U.S. Treasury would at least double the size of the government's long-term debt buyback program.

The timing of this announcement is quite unusual, coming just two weeks after the Treasury Department’s last routine quarterly briefing, in which such policy adjustments are usually disclosed.

The Treasury’s long-standing commitment to investors to the principle of “regularity and predictability” is therefore under scrutiny.

The current bond repurchase program was launched in 2024 with the initial aim of improving the trading conditions of older securities with less liquidity.

However, last week's announcement did not show any obvious signs of market failure. Bessant attributed its actions to the yield level itself, stating that it failed to reflect economic fundamentals. This move was interpreted by the market as a subtle shift in the policy focus of the plan: to include curbing the rise in long-term yields in its objectives.

This has sparked speculation about possible follow-up measures, including reducing the scale of long-term government bond auctions—the latter potentially having a more far-reaching impact. It's worth noting that Bessant himself publicly stated before taking office that such debt management operations carry significant risks.

Prominent investor Stanley Druckenmiller criticized the buyback program in an op-ed published in The Wall Street Journal this week, calling it "price management" and pointing out that it was "a much bigger mistake than the $4 billion figure suggests."

The methods for suppressing yields are not limited to this.

Long-term debt buybacks are not the first time Bessant has touched upon interest rate tools.

Previously, Bessant pressured the Federal Reserve to provide more dollar liquidity to the Bank of Japan, partly to allow Tokyo to defend the yen's exchange rate without having to sell U.S. Treasury bonds, a sale of which would put upward pressure on yields.

In addition, the Trump administration earlier this year asked Fannie Mae and Freddie Mac, both government-controlled companies, to increase their purchases of mortgage-backed securities in order to lower mortgage rates.

The U.S. Treasury Department refuted external criticism. A Treasury spokesperson stated that prior to the global financial crisis, debt management decisions were made entirely by the Treasury Department. The spokesperson added:

The Treasury Department, under Secretary Bessant's leadership, is reclaiming this power to fulfill its responsibility—financing the federal government in a way that minimizes the long-term cost to American taxpayers.

Bessant himself stated that bond buybacks would not interfere with monetary policy, and that the Treasury and the Federal Reserve "would coordinate in case of any changes to their balance sheets."

Internal divisions within the Federal Reserve have intensified, leading to a sharp increase in policy pressure.

Meanwhile, significant disagreements have emerged within the Federal Reserve regarding the direction of interest rates. Last month, three officials voted to raise rates at the Fed's interest rate decision. Against this backdrop, Bessant's intervention in the bond market further complicated the situation.

Jon Faust, who served as an advisor to three former Federal Reserve chairmen, said:

If Bessant's actions successfully lower long-term interest rates and borrowing costs, it will clearly push the vast majority of members of the Federal Open Market Committee (FOMC) to support raising interest rates.

He also criticized:

Taking this action on the eve of the Jackson Hole convention is, in my opinion, quite inappropriate, even a slap in the face.

Bessant's approach echoes his public stance over the past year, during which he has repeatedly broken with his predecessors' tradition of not commenting on monetary policy, publicly advocating that the Federal Reserve is overly focused on inflation.

MIT professor and former European Central Bank official Athanasios Orphanides holds a relatively moderate position, believing that the Treasury has the right to manage debt according to its judgment, and the Federal Reserve's responsibility is not to question these policies, but to take their economic impact into account when making interest rate decisions.

Minneapolis Federal Reserve President Neel 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."

Walsh's policy framework and fiscal intervention create an inherent tension.

This series of developments is deeply contradictory to the policy thinking that Walsh has had since taking office.

Warsh argues that the Federal Reserve should reduce its forward-looking statements on future actions in order to obtain more accurate signals from market prices.

Last month, he viewed the rise in Treasury yields as evidence of a spontaneous tightening of financial conditions in the bond market. However, if the trend in yields now incorporates factors of proactive intervention by the Treasury, the purity of the aforementioned market signal will be significantly diminished.

Since taking office, Warsh has established five working groups to review the Federal Reserve's policy-making and data operations. Bessant previously praised Warsh as the "new law enforcement officer," and the two regularly have breakfast together, having known each other before taking office, and both have worked closely with well-known investor Stanley Druckenmiller.

Historically, the Federal Reserve has not always been independent of the Treasury Department. During World War II, the Fed cooperated in lowering Treasury yields to finance the war effort. This arrangement ended in 1951 with an agreement during a dispute over financing the Korean War, which is considered the historical starting point for the Fed's independence.

Last year, Walsh mentioned his intention to draft an updated version of the 1951 agreement. Now, as another war triggers a new round of inflationary pressures, the echoes of history seem particularly profound as he faces Bessant, who is in charge of the related economic diplomacy.

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