Warsh faces Fed independence test as Bessent moves in on central bank’s

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 buy back at least $2 billion worth of long-dated treasuries on top of its existing plans. 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. 

“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.