If Treasury Secretary Scott Bessent truly wants to bring the full force of the federal government to bear on what he sees as a misbehaving bond market, he can’t go it alone. A sustained effort to bring down Treasury yields would eventually require coordination with Bessent’s longtime friend, now at the Federal Reserve, Chairman Kevin Warsh.
Bessent’s efforts to influence the bond market will add to the immense scrutiny on Warsh to clarify where he stands on the Fed’s independence and on its attitude about the vast pool of U.S. government debt.
The Fed has historically only intervened in the bond market to affect yields in periods of severe economic weakness or clear emergencies. The concerns Bessent has expressed so far fall below that threshold, and there is no sign the central bank intends to get involved now. But there is no definitive line between where Treasury’s responsibilities end and the Fed’s begin, and Warsh has said repeatedly that he believes the Fed ought to hand more power to the Treasury over sensitive matters involving the Fed’s balance sheet.
The Treasury Department on Wednesday announced it would at least double the maximum size of its planned long-dated treasury buybacks, from $2 billion to at least $4 billion per operation. That would need to be offset by shorter-maturity debt.
Bessent suggested he might have more plans in store. “We have a big toolkit, so we’ll see,” Bessent said on CNBC Thursday.
“Part of it is signaling here and to show that we believe that the yields don’t reflect the underlying fundamentals,” Bessent said. Yields on the 10-year Treasury note dropped on Wednesday, but had already unwound most of those gains on Thursday.
10-year Treasury, 5 days
“There’s more firepower in terms of how you manage the yield curve sitting at the Federal Reserve,” Rick Rieder, chief investment officer of global fixed income, told CNBC Wednesday.
“Going to Jackson Hole, that’s going to be interesting to see how they address that,” Rieder said.
Warsh was already facing questions about his relationship to the Treasury market going into the Jackson Hole Economic Policy Symposium, the annual late-August gathering of central bankers in the Wyoming mountains.
Warsh’s remarks after the FOMC’s July meeting gave some in the markets the impression that he welcomed a rise in long-term bond yields.
Bond traders raised yields further to account for that uncertainty, said Loretta Mester, former president of the Cleveland Fed.
“I think part of what’s happening is we don’t have very much clarity yet on what Kevin Warsh’s plans are,” Mester said in an interview on CNBC. “We don’t even have clarity on their reaction function.”
Warsh in July said he was concerned about inflation, but didn’t directly answer reporters’ questions about what it would take for him to raise interest rates to address it.
Fed independence
Warsh has also been vague on the precise limits of the Fed’s authority over certain aspects of the financial system.
“Fed independence is at its peak in the conduct of monetary policy,” Warsh said at his Senate confirmation hearing in April. That nuanced view implies that some aspects of the Fed’s operations aren’t fully independent. Warsh carved out bank supervision as an example of non-independent policy, but he hasn’t fully specified exactly what is and isn’t included.
Warsh has separately said he wants the Fed to rewrite its relationship with the Treasury. He proposed in 2025 to update the 1951 Treasury-Fed Accord, which established the modern basis for the division of responsibilities between the two agencies — and secured the Fed’s political independence. As part of that revised accord, Warsh wanted to give the Treasury more authority over any major adjustment to the Fed’s vast balance sheet.
“The Treasury secretary would need to find the proposed change in Fed holdings acceptable, given that it is partially fiscal policy in disguise,” Warsh said in 2025.
How the Fed thinks about the $6.7 trillion in financial assets currently on its balance sheet could make or break Bessent’s plans. Warsh’s existing plans would seem to cut against Bessent’s hopes to tamp down yields. Warsh wants the Fed to reduce its overall holdings and shift them toward short-term debt, which would likely push up the yield on longer-term Treasuries — the opposite of what Bessent wants to achieve.
But the Fed is divided even on that question. Recently released minutes from the Federal Open Market Committee’s July meeting showed that the Fed deferred questions about its balance sheet until a task force Warsh has assigned to report on that issue comes back. That will be late this year or early next.
The Treasury and Fed have in practice historically communicated with each other on major changes in the balance sheet. Bessent on Thursday in an interview on CNBC suggested that would continue.
“I think that the Treasury and the Fed would work together if there was any change in the balance sheet, and we would adjust to any kind of runoff that they’re doing,” Bessent said.
Neither the Fed nor the Treasury Department responded to emailed questions about whether Bessent’s comment implied he and Warsh had begun to coordinate.
