Did Bessent Put the Fed in a Bind?
The Treasury Department’s plan for bond interventions has calmed markets. But Wall Street is worried about the fallout for inflation and more.
Andrew here. Treasury Secretary Scott Bessent spent his career on Wall Street, and now he’s using that trader mind-set in Washington to financially engineer lower interest rates. The unconventional move is raising plenty of questions.
Was it political? Probably. Will it work? Maybe in the short term. The real story is what happens down the road. We unpack the potential long-term consequences below.
Possible fallout from the Bessent buyback
Global bond markets finally look tame on Thursday, after the Treasury Department unexpectedly unveiled a stunning plan to buy back billions in long-dated government bonds.
But that calm may mask new tensions between the Trump administration and the Fed, while market watchers warn that the intervention could backfire, Bernhard Warner reports.
The effect of the buyback, not its size, matters. The Treasury Department will at least double repurchases of longer-dated Treasuries, spending up to $4 billion at a time, at several points between Sept. 9 and Nov. 4, the day after Election Day in the U.S.
Traders responded by buying up 30-year Treasury bonds, pushing yields lower on Wednesday. The dollar sunk and stocks barely budged, as investors flooded into gold and cryptocurrencies.
Some analysts don’t regard the scale of the operation as significant. “I think it’s just jawboning to get market yields lower,” Lawrence Gillum, the chief fixed income strategist for LPL Financial, told DealBook, calling it a “temporary” fix.
But the message could have a more enduring effect. Treasury Secretary Scott Bessent put traders on notice that the Trump administration would intervene in the markets to lower borrowing costs.
After efforts to prop up Argentina’s currency market and the struggling Japanese yen, Bessent, a former hedge fund chief and currency trader, has been called the most “interventionist” Treasury secretary in decades.
Some see a political motive in the timing. Joe Brusuelas, the chief economist at the audit and consulting firm RSM US, wrote to investors on Wednesday that Bessent’s “interest is purely short term and is organized around the upcoming election and not a return to price stability.”
Worth noting: The Treasury does this kind of maneuver from time to time, but usually at scheduled intervals. In 2024, some economists and Republican lawmakers criticized Janet Yellen, Bessent’s predecessor during the Biden administration, for intervening in the Treasury market ahead of the general election.
Market observers are wondering if Treasury market interventions will become a permanent feature of American politics. Or, at the least, whether they’ll become more frequent so long as Congress fails to address ballooning federal deficits.
The more immediate issue could involve Bessent and Kevin Warsh, Trump’s handpicked Fed chairman. Bessent’s desire to lower yields (to bring down prices) appears to be at odds with the Fed’s growing focus, raising rates to bring down inflation.
“It probably means more volatility ahead within the rates market,” Gillum told DealBook.