At the end of August, US Treasury Secretary Scott Bessent announced a program to purchase long-term bonds, which the department is scheduled to begin on September 9.
This measure is intended to curb rising borrowing costs after long-term Treasury yields reached a 19-year high. However, according to the Financial Times, market participants believe the Treasury's intervention could undermine its credibility and complicate the Federal Reserve's fight against inflation.
The problem is that the Treasury and the Federal Reserve are effectively acting in opposite directions. Bond purchases are intended to reduce bond yields and, consequently, the cost of mortgages and other borrowing, stimulating economic activity. Meanwhile, some Fed officials advocate raising interest rates to cool the economy and bring inflation back to the 2% target. During the July vote, three members of the Federal Open Market Committee (FOMC) already supported a rate hike.
Investors are criticizing Bessent's approach to pricing in the government debt market. According to Krishna Guha, vice chairman of Evercore ISI, the Treasury's actions could be concerning not only for investors but also for FOMC members. Bessent's statements that bond yields are overvalued, do not reflect the true state of the economy, and should be adjusted through intervention contradict the position of Fed Chairman Kevin Warsh, who calls for focusing on economic data and market prices and not interfering with market signals.
Harvard University professor and former chairman of the Council of Economic Advisers under President Barack Obama Jason Furman warns that further Treasury intervention and pressure on the Fed could lead to fiscal dominance—a situation in which monetary policy is tailored to the government's debt management needs. This could threaten the regulator's independence and investor confidence in the US government debt market.