Bessent's $4B bond buyback deepens rift with Fed's Warsh

Treasury Secretary Scott Bessent's $4 billion bond buyback expansion has put Federal Reserve Chair Kevin Warsh on the defensive over who sets the price of money, as the 30-year Treasury yield holds near 5.3 percent.

"Bessent's action gives you hints of a potential erosion of the Fed's independence and certainly questions around the Fed's credibility when it comes to making policy," said Gregory Daco, chief economist at EY-Parthenon and president of the National Association for Business Economics.

The Treasury Department said Wednesday it would at least double the maximum size of its planned long-dated buybacks, from $2 billion to at least $4 billion per operation, financed by selling short-term T-bills. The 10-year Treasury yield fell on the announcement but had unwound most of those gains by Thursday. The 30-year yield had climbed above 5.3 percent, its highest level since 2007, before the intervention.

Warsh, who took office May 22, faces a high-stakes test Friday when he delivers his keynote speech at the Fed's annual Jackson Hole symposium. Economists and investors want clarity on how he would respond if inflation stays elevated, and whether he would raise the benchmark rate, which has been unchanged since the Fed's July 29 meeting.

The buyback move marks a sharp departure from Treasury's tradition of predictable debt management. Thomas Simons, chief U.S. economist at Jefferies, told Reuters the surprise announcement upended Treasury's commitment to "regular and predictable" issuance and felt "shot from the hip." Lou Crandall, chief economist at Wrightson ICAP, said Bessent "has opened the door to a lot of speculation about what authorities might have up their sleeves."

The intervention comes as federal borrowing needs balloon. Gross national debt crossed $40 trillion, and the Congressional Budget Office estimates this year's deficit at $2.1 trillion — roughly twice Bessent's target of 3 percent of gross domestic product by 2028. Net interest costs reached $963 billion in the first 10 months of the fiscal year, more than Pentagon spending over the same period. The Supreme Court's decision to strike down Trump's tariffs will add an estimated $2 trillion to deficits from 2026 through 2036, while last year's tax-and-spending law adds $4.7 trillion over the same window.

Warsh's silence on rate path tests market patience

Warsh has declined to provide forward guidance on rate moves, arguing it limits the Fed's flexibility. At his July 29 press conference, he ducked repeated questions on whether the Fed would hike if inflation stays high, saying higher rates "could well be part of that solution" but adding "I wouldn't say it's in isolation." He cited the personal consumption expenditures price index as the Fed's preferred inflation gauge but suggested that could change next year after task forces he appointed make recommendations.

"What he needs to do is to clarify the conceptual framework he'll bring to directing monetary policy," said David Wilcox, senior fellow at the Peterson Institute for International Economics. "He's refused to provide even that amount of illumination."

The uncertainty has pushed long-term yields higher. Loretta Mester, former president of the Cleveland Fed, said bond traders raised yields further because "we don't have very much clarity yet on what Kevin Warsh's plans are." Marco Casiraghi, senior economist at Evercore ISI, said Bessent's twist program would lead to a weaker dollar, which at the margin means more inflation.

The 1951 accord under strain

Warsh has said he wants to rewrite the 1951 Treasury-Fed Accord, which established the modern division of responsibilities between the two agencies and secured the Fed's political independence. He proposed in 2025 giving the Treasury more authority over major adjustments to the Fed's $6.7 trillion balance sheet, arguing that such changes are "partially fiscal policy in disguise."

Bessent's buyback plan cuts against Warsh's stated preference for shrinking the Fed's holdings and shifting toward shorter-duration securities, which would push long-term yields higher. But Bessent said Thursday the Treasury and Fed "would work together if there was any change in the balance sheet."

The two men meet weekly for breakfast or lunch, yet little is known about their discussions. President Donald Trump's continued calls for lower rates, and his renewed effort to remove Fed governor Lisa Cook, add political pressure. Diane Swonk, chief economist at KPMG, wrote that "politics are adding to the Fed's credibility problems."

If Warsh fails to provide clarity Friday, Derek Tang, economist at Monetary Policy Analytics, said "just yields not rising would be a victory." The last time the Fed faced this level of Treasury pressure was in the years before the 1951 accord, when the central bank was forced to cap yields to finance wartime debt — a precedent Warsh has cited as a cautionary tale.

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