Bensen wants to save US Treasury bonds, while Waller is fighting inflation. Will the Treasury Department and the Federal Reserve "sing their own tunes"?

US Treasury Secretary Basent’s abrupt intervention to expand long-term Treasury buybacks is now in direct conflict with Federal Reserve Chair Walsh’s anti-inflation stance. Major Wall Street investment institutions are generally warning that the policy goals of these two major entities have clearly diverged, and this tension is expected to erupt during Walsh’s Jackson Hole speech this Friday.

Last week, Basent announced that the scale of long-term Treasury buybacks would be “at least doubled” in an attempt to suppress the continued rise of long-end yields. However, the effect of the intervention faded within a day, and yields soon returned to high levels. Meanwhile, the US dollar fell nearly 1% for the week, gold broke through $4,600, and Bitcoin surged over 25% in a single week—markets interpreted this combination as a chase for the “currency depreciation” narrative rather than a signal of policy effectiveness.

Walsh will deliver a speech this Friday at Jackson Hole, Wyoming. This is his first major public statement since the controversial July rate decision, and also the first time he faces such intense market pressure since taking office in May. The most urgent question for traders is: In the face of inflation stubbornly above the 2% target and the worsening fiscal situation, what exactly is the Fed’s policy response function?

Basent’s operation is against the backdrop of long-term Treasury yields nearing 19-year highs, putting the $32 trillion Treasury market under pressure. The US Treasury announced that starting from September, the buyback of less liquid long-term bonds will double, with an additional quarterly buyback amount of about $16 billion, and each operation will increase from about $2 billion to at least $4 billion.

But the market’s reaction quickly revealed the limitations of this move. Peter Tchir of Academy Securities noted that currently, there are $7.5 trillion in short-term Treasury bills and $21.7 trillion in coupon-bearing bonds circulating. Basent’s $4 billion buybacks, almost weekly, are not enough to truly move the market. He judges that this is not quantitative easing, but essentially just “rearranging chairs on the deck” without actually creating money.

Wall Street criticism quickly followed. PGIM Credit Co-Chief Investment Officer Greg Peters said, “I have an extremely negative view of the Treasury’s operational logic; this is a self-imposed, self-defeating strategy.” Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett criticized that intervening in the Treasury market simply because of being “annoyed by rising yields” is “not a convincing reason; it seems arbitrary.” She added that if Basent continues to try to control the yields of the world’s most important bond market, it would be tantamount to admitting Washington’s concerns over debt sustainability.

Hedge fund billionaire Stanley Druckenmiller was even more direct, labeling the operation a “mistake.” He wrote in a column published by The Wall Street Journal:

“This is not liquidity management, but price management—a mistake far more harmful than the mere $4 billion involved.”

The direct target of Basent’s intervention is precisely the core message Walsh has long conveyed to the market. Walsh previously made it clear that rising yields reflect economic fundamentals requiring higher borrowing costs and emphasized that under his leadership the Fed is “striving not to interfere with market signals.” His core strategy is to guide investors to price based on economic data and market prices, rather than relying on central bank forward guidance.

This is in direct opposition to Basent’s logic. In an interview after the intervention, Basent claimed that rising yields “do not reflect fundamentals” and stated that the Treasury has a “powerful toolbox.”

Evercore ISI Vice Chairman Krishna Guha pointed out that the Treasury's actions may not only unsettle investors, but “also some within the FOMC.” He said:

“Walsh’s core stance is hard to reconcile with what the Treasury is doing. If the Treasury Secretary tells the market that prices are wrong and intervenes directly, it becomes difficult for Walsh to rely on the price discovery function of the bond market.”

Differences within the Fed should not be overlooked. Reports indicate that at the July FOMC meeting, three committee members supported a rate hike. Afterwards, several regional Fed presidents also publicly expressed support for a 25 basis point increase. Markets now price in a 78% probability of a rate hike this year. Westwood fixed income portfolio manager Scott Barnard stated that the combination of Walsh’s abandonment of forward guidance and Basent’s intervention to suppress long-end yields has left the market with the impression that the two institutions “are going their separate ways.”

The weight of Walsh’s speech on Friday goes beyond the topic framework of the Jackson Hole meeting itself—this year’s theme is “Financial Innovation: Implications for Payments and Policy,” which does not directly address the path of monetary policy.

TD Securities US rates strategist Molly Brooks warned, “If Walsh just repeats the same old message, I think the market will be disappointed, and this could intensify the long-end selloff we have already seen.” HSBC rates strategist Dhiraj Narula believes that Walsh has the opportunity to soothe the market through his language—“If Chair Walsh can offer a characterization of underlying inflation pressures, that would already provide some basis for lowering uncertainty-driven term premiums.”

Bank of America Global Research Head of US Rates Strategy Mark Cabana stated that Walsh’s “steadfast commitment” to lowering inflation is far from enough for the market: “We need to hear concrete plans on how the Fed will bring down inflation in the face of ongoing underperformance.” The latest US inflation reading is 3.7%, now above the 2% target for over five years.

Bloomberg Markets Live strategist Michael Ball pointed out that Basent can adjust the debt maturity structure, but only the Fed can anchor inflation expectations. Walsh’s Jackson Hole speech must reaffirm that the 2% target is still attainable, and make it clear that—even if it causes friction with the administration—the Fed will take policy action if inflation persists.

Before the Jackson Hole speech, markets will also see July’s Personal Consumption Expenditures (PCE) data on Wednesday. Over the past month, inflation, employment, and retail sales data have all met or come in below expectations, leading traders to scale back near-term rate hike expectations. Should PCE continue this trend, it may offer some breathing room for Walsh’s speech.

The deeper concern triggered by the ineffectiveness of Basent’s intervention is whether the Fed will be drawn into the fray. The Trump administration’s explicit political goal of lowering borrowing costs ahead of the November midterm elections has significantly heightened market attention on the Fed’s independence.

Harvard professor and former Chair of the White House Council of Economic Advisers Jason Furman stated:

“If the Fed includes debt management objectives in its monetary policy decisions, that would have the overtones of fiscal dominance.”

The debate over policy coordination is also heating up in the market. Some analysts have proposed that the Fed could sell its roughly $426 billion in short-term bonds and buy an equivalent nominal amount of 20-year or longer Treasuries, mimicking the “Operation Twist” mode. While this does not alter the total holdings on the Fed’s balance sheet, making it politically easier to accept, it would absorb more than 15% of outstanding 20-year-plus bonds, effectively suppressing long-end yields.

However, Bloomberg analysis points out that there is an internal contradiction in this combo: The higher the share of short-term financing, the greater the Treasury’s exposure to the policy rate. If inflation forces the Fed to raise rates, interest costs will reset faster; if the Fed hesitates to hike due to concern over fiscal costs, the market will exact a higher term premium, penalizing its independence.

It is worth noting that Walsh and Basent are both protégés of hedge fund billionaire Stanley Druckenmiller and are reportedly on good terms with regular meetings. However, investors and economists widely point out that the priorities and operational logic of the institutions they lead are becoming increasingly incompatible. The 5% yield on the 30-year Treasury is seen as a key threshold, and Walsh’s statement this Friday will determine the market’s pricing direction regarding this policy rift.