"New Federal Reserve News Agency": Bessent's frequent interventions test the boundaries of Federal Reserve independence

Nick Timiraos, a reporter at The Wall Street Journal, which the market now hails as the "new Fed news agency," has published a new article highlighting that U.S. Treasury Secretary Bessent is gradually stepping into policy areas traditionally overseen by the Federal Reserve through a series of measures, bringing the issue of central bank independence back into market focus.

Last week, Bessent abruptly announced a substantial expansion of government long-term Treasury buybacks, aiming to suppress the long-term yield that has surged to a 19-year high. This move comes just as the Federal Reserve may be looking to tighten financial conditions, potentially creating a direct conflict with the direction of monetary policy.

Meanwhile, Bessent has previously pressured the Fed to provide more dollar liquidity to foreign central banks and showed interest in the selection for the President of the Atlanta Fed — a position vacant since March this year.

These developments put Fed Chair Walsh, who is set to appear at the Jackson Hole Symposium, in a delicate spot, with central bankers worldwide expected to discuss this topic extensively during the conference.

Amid high inflation and existing internal divisions over interest rate policy, if the Treasury's debt management operations continue to signal a direction contrary to monetary policy, it may further blur the functional boundaries between the central bank and the executive authority.

Last week, Bessent announced that the U.S. Treasury would at least double the scale of government long-term debt buybacks.

The timing of this announcement is unusual, coming just two weeks after the last routine Treasury quarterly briefing, when such policy changes are typically disclosed.

The Treasury’s long-standing promise to investors of "regularity and predictability" has therefore come under scrutiny.

The current bond buyback plan began in 2024, initially aimed at improving trading conditions for older, less-liquid securities.

However, last week's announcement came without any obvious signs of market malfunction. Bessent cited the yield levels themselves as justification, stating these yields did not reflect economic fundamentals. The market interpreted this as a quiet shift in policy focus: the containment of rising long-term yields is now a target.

This has spurred speculation over possible follow-up measures, including a reduction in the size of long-term Treasury auctions — a move with potentially deeper impacts. Notably, Bessent had publicly stated before taking office that such debt management operations carry significant risks.

Prominent investor Stanley Druckenmiller criticized the buyback plan in The Wall Street Journal this week, calling it "price management" and stating it is "a far bigger mistake than the $4 billion involved would suggest."

The long-term debt buyback was not Bessent’s first venture into interest rate tools.

Previously, Bessent pressured the Federal Reserve to provide more dollar liquidity to the Bank of Japan, in part to allow Tokyo to defend the yen without having to sell U.S. Treasuries, as such sales would push yields higher.

Additionally, earlier this year, the Trump administration had already asked government-controlled Fannie Mae and Freddie Mac to increase purchases of mortgage-backed securities to suppress mortgage rates.

The U.S. Treasury has refuted external criticism. A Treasury spokesperson stated that before the global financial crisis, debt management decisions were made entirely by the Treasury itself. The spokesperson said:

Under Secretary Bessent, the Treasury is reclaiming that authority to fulfill its duty — to finance the federal government at the lowest long-term cost to U.S. taxpayers.

Bessent also stated that bond buybacks will not interfere with monetary policy and that the Treasury and the Federal Reserve "will coordinate any changes on the balance sheet."

At the same time, there are already clear internal divisions at the Federal Reserve over the direction of interest rates. At last month's FOMC decision, three officials voted for a rate hike. Against this backdrop, Bessent’s intervention in the bond market adds further complexity.

Jon Faust, a former advisor to the last three Fed chairs, stated:

If Bessent’s actions succeed in suppressing long-term rates and borrowing costs, it will clearly push a large majority of the Federal Open Market Committee (FOMC) towards supporting a rate hike."

He also criticized:

Taking such action right before the Jackson Hole Symposium seems highly inappropriate to me; it could even be viewed as a slap in the face.

Bessent’s approach echoes her public stance over the past year, where she has repeatedly broken with her predecessors’ tradition of not commenting on monetary policy, and has openly argued that the Fed is overly fixated on inflation.

Athanasios Orphanides, professor at MIT and former European Central Bank official, takes a relatively moderate view, believing that the Treasury has the right to manage debt as it sees fit, and it is not the Fed’s role to challenge these policies, but rather to take their economic impact into consideration when setting interest rates.

Minneapolis Fed President Neel Kashkari stated in a TV interview this week that he has seen no signs that recent bond market selloffs have made the Fed’s job harder and that the Treasury market is "functioning normally."

This series of developments represents a deep-seated contradiction with Walsh’s policy framework since taking office.

Walsh believes the Fed should reduce forward guidance on future moves to better extract genuine signals from market prices.

Last month, he saw rising Treasury yields as evidence that the bond market was autonomously tightening financial conditions. But if yields are now being influenced by active Treasury intervention, the purity of this market signal is significantly compromised.

Since taking office, Walsh has created five task forces to review the Fed’s policy-making and data operations. Previously, Bessent has praised Walsh as the "new sheriff"; the two meet weekly for breakfast, knew each other before taking office, and both have had close collaborations with noted investor Stanley Druckenmiller.

Historically, the Fed has not always been independent of the Treasury. During World War II, the Fed cooperated in suppressing Treasury yields to finance the war; that arrangement ended in 1951 through an agreement in the wake of a dispute over Korean War financing, which is considered the starting point for Fed independence.

Walsh mentioned last year his intention to write an updated version of the 1951 accord. Now, with a new war fueling another round of inflationary pressure, and facing Bessent leading the related economic diplomacy, the echoes of history feel especially profound.