Besant intervenes in the bond market, casting a shadow over Walsh's call for the market to "follow the data"

Scott Bessent, the U.S. Secretary of the Treasury, has initiated interventions to lower long-term borrowing costs, adding new uncertainties to the Federal Reserve's policy decisions.

Bessent announced an expansion of long-term Treasury repurchase operations, prompting a drop in the 30-year Treasury yield. However, the market rebound lasted only a day, with yields quickly returning to pre-announcement levels, reflecting deep skepticism about the actual efficacy of the move.

Meanwhile, the policy signal confusion triggered by this move directly disrupted the new communication framework recently established by Federal Reserve Chair Kevin Warsh.

For the market, this situation poses a dual risk: If the Treasury succeeds in suppressing long-end yields, looser financial conditions will contradict still-elevated inflation, potentially forcing the Federal Reserve to resume rate hikes; if the intervention fails, the upward pressure on borrowing costs caused by ballooning debt will continue to trouble policymakers.

Following the July FOMC meeting, Warsh explicitly urged investors to base their actions on economic data rather than the Fed's own rate projections. "Market participants are learning to follow the ball, not watch the referee—the market will continue to react in the direction and magnitude it deems appropriate," he said.

The core logic of this framework is to let market pricing act as an unfiltered signal, providing the Federal Reserve with independent reference for economic judgment. However, Bessent’s repo operations directly interfered with this signaling chain.

"This is clearly inconsistent with the 'follow the ball' approach Warsh advocates," said Wolfe Research chief economist Stephanie Roth. "In theory, it blurs the signals we receive from the market—signals the Fed claims to be increasingly relying on."

Krishna Guha, vice chairman at Evercore ISI, wrote in a research note that Bessent’s initiative will dilute Warsh’s guidance that "the market can independently form judgments on the economy and monetary policy, without any hints from the Fed." "When investors see Bessent trying to manage the long end, that argument no longer holds up," Guha wrote.

Bessent pushed back against criticism in an interview with CNBC, denying that this intervention would influence the Fed’s rate hike decisions. "This has nothing to do with the repo decision I announced this week," he said. "Part of this is sending a signal that we believe current yields do not reflect fundamentals."

However, critics argue that the operation does not address the root cause of rising long-term borrowing costs: the persistent expansion of U.S. debt. Total U.S. public debt has surpassed $40 trillion for the first time, surging by one-third in under five years, with the public showing little willingness to cut spending.

San Francisco Fed President Mary Daly adopted a cautious stance in an interview Thursday, stating, "It’s still early days; I don’t want to comment prematurely before we’ve had a chance to give these issues serious thought."

The Treasury’s action comes amid the Fed’s already delicate policy window. According to the July 28-29 Federal Open Market Committee (FOMC) minutes, several officials supported rate hikes at last month’s meeting, and many indicated further tightening would be necessary if inflation fails to decline.

Subsequent economic data have shown signs of cooling, easing rate hike pressure to some extent: July retail sales posted their largest monthly decline in over a year, and core inflation has also moderated.

Kathy Bostjancic, chief economist at Nationwide, said she does not believe the Treasury’s action will complicate the Fed’s interest rate outlook. "But the irony is, Chair Warsh has emphasized he places great importance on 'unfiltered' feedback from the market."

Some analysts warn that if Bessent’s operation is effective, it may force the Fed to take a more hawkish stance.

Blake Gwinn, head of U.S. Rates Strategy at RBC Capital Markets, pointed out that if one reason for previously pausing rate hikes was that the long end was 'tightening financial conditions for the Fed,' then if yields fall sharply due to Bessent’s actions, 'theoretically, the need for rate hikes should rise.'

Ultimately, the effectiveness of this intervention remains to be seen. Supporters describe it as a flexible move to contain funding costs amid a global surge in government bond yields; skeptics argue that as long as debt continues to grow, no technical operation can fundamentally alter the market’s view of the U.S. fiscal trajectory.