The intervention by Bessenet precisely targets the "market signals" that Walsh has always emphasized. Walsh advocates allowing investors to price independently based on economic data and market prices, rather than relying on central bank guidance. Wall Street widely warns that the policy objectives of the Treasury and the Federal Reserve have diverged significantly, and this tension is expected to come to a head in Walsh's Jackson Hole speech this Friday.

Written by: Zhang Yaqi, Wall Street Insights

The sudden intervention by U.S. Treasury Secretary Bessenet to expand the long-term debt buyback is in direct conflict with Federal Reserve Chairman Walsh's anti-inflation stance. Major investment institutions on Wall Street uniformly warn that the policy goals of the two agencies have clearly diverged, and this tension is expected to escalate in Walsh's Jackson Hole speech this Friday.

Bessenet announced last week that the repurchase scale of long-term U.S. Treasury bonds will "at least double," aiming to suppress the continuously rising long-end yields. However, less than a day after the intervention, its effects faded, and yields returned to high levels. Meanwhile, the dollar fell nearly 1% that week, gold surpassed $4,600, and Bitcoin surged over 25% that week—markets interpreted this combination as a surge in "currency devaluation" narratives rather than a sign of effective policy.

Walsh is scheduled to speak at Jackson Hole, Wyoming, this Friday. This will be his first significant public statement since the controversial interest rate decision in July, and it will be his first time facing such high levels of market pressure since taking office in May. What traders most urgently want to know is: in the face of stubborn inflation above the 2% target and a deteriorating fiscal situation, what exactly is the Federal Reserve's policy response function?

Bessenet's Intervention in the Bond Market: Limited Effect and Big Controversy

The background for Bessenet's action is that long-term U.S. Treasury yields have risen to their highest levels in nearly 19 years, placing pressure on the $32 trillion bond market. The U.S. Treasury announced it will double the buyback scale of low-liquidity long-term bonds starting in September, with an additional buyback scale of about $16 billion each quarter, increasing the amount from approximately $2 billion to at least $4 billion per operation.

However, the market's response quickly revealed the limitations of this action. Peter Tchir of Academy Securities pointed out that currently, the U.S. government has $7.5 trillion in short-term treasury bills and $21.7 trillion in coupon bonds circulating in the market. Bessenet's nearly weekly buyback of $4 billion each time is simply insufficient to sustainably shake the market. He judged that this is not quantitative easing but fundamentally just "rearranging the chairs on the deck," and it does not truly create money.

Criticism from Wall Street came in waves. PGIM Credit's co-chief investment officer Greg Peters expressed a "very negative view" on the Treasury's operational logic, calling it a self-limiting, self-defeating strategy. Morgan Stanley Wealth Management's chief investment officer Lisa Shalett criticized that intervening in the Treasury bond market because of "frustration" over rising yields "is not a convincing reason and has a capricious flavor." She added that if Bessenet continues to try to control the yields of the world's most important bond market, it would be tantamount to acknowledging that Washington is concerned about debt sustainability.

Hedge fund billionaire Stanley Druckenmiller more directly characterized this operation as "wrong." In a column published by The Wall Street Journal, he wrote:

"This is not liquidity management; it is price management—an error far more damaging than $4 billion itself."

Walsh's Contradictory Position, FOMC Also Shows Disagreement

The direct target of Bessenet's intervention is the core signal that Walsh has consistently communicated to the market. Walsh had previously made it clear that the rise in yields reflects the economic fundamentals that necessitate higher borrowing costs, emphasizing that the Federal Reserve under his leadership is "trying hard not to interfere with market signals." His core strategy is to guide investors to price independently based on economic data and market prices, rather than relying on central bank forward guidance.

This stands in direct opposition to Bessenet's logic. In an interview after the intervention, Bessenet stated that the rise in yields "does not reflect fundamentals," and claimed that the Treasury has a "robust toolbox."

Evercore ISI Vice Chairman Krishna Guha noted that the Treasury's actions might not only make investors uneasy, "but could also unsettle some people within the FOMC." He stated:

"Walsh's core position is difficult to reconcile with what the Treasury is doing. If the Secretary of the Treasury tells the market that prices are wrong and intervenes directly, it becomes challenging for Walsh to rely on the price discovery mechanism of the bond market."

The internal divisions within the Federal Reserve cannot be ignored. Reports have indicated that at the July FOMC meeting, three members supported raising rates. Subsequently, several regional Federal Reserve presidents openly expressed support for a 25 basis point increase. The market currently prices an 78% probability of a rate hike this year. Westwood fixed income portfolio manager Scott Barnard stated that Walsh's abandonment of forward guidance, combined with Bessenet's intervention to suppress long-end yields, has left the impression of "the two agencies going their separate ways" in the market.

The Market Awaits Walsh's Answer

The significance of Walsh's speech on Friday has transcended the topic framework of the Jackson Hole conference itself—this year's conference theme is "Financial Innovation: The Impact on Payments and Policy," which does not directly point to monetary policy paths.

TD Securities U.S. interest rate strategist Molly Brooks warned, "If Walsh continues with the old script, I think the market will be disappointed, which may exacerbate the long-end sell-off we've already seen." HSBC rate strategist Dhiraj Narula believes that Walsh has the opportunity to soothe the market through his wording, "If Chairman Walsh can characterize the potential inflation pressure, that would be enough to provide some basis for reducing the term premium related to uncertainty."

Bofa's Global Research U.S. Interest Rates Strategy Head Mark Cabana stated that Walsh's "strong commitment" to lowering inflation is far from sufficient for the market, "We need to hear the specific plans the Federal Reserve has to drive inflation back down in the face of a sustained failure to meet the targets." The latest U.S. inflation reading stands at 3.7%, having remained above the 2% target for over five years.

Bloomberg Markets Live strategist Michael Ball pointed out that while Bessenet can adjust the debt maturity structure, only the Federal Reserve can anchor inflation expectations. Walsh's Jackson Hole speech must reiterate that the 2% target is still achievable and make it clear—if inflation persists, even if friction arises with the administration, policy action will be taken.

Before the Jackson Hole speech, the market is also awaiting the July personal consumption expenditures (PCE) data this Wednesday. Over the past month, inflation, employment, and retail sales data have all met expectations or fallen below expectations, prompting traders to lower their recent rate hike expectations. If PCE continues this trend, it may provide some buffer for Walsh's speech.

The Shadow of "Fiscal Dominance," Independence Under Test

The deeper concerns raised by Bessenet's ineffective intervention focus on whether the Federal Reserve will be drawn into the situation. The Trump administration aims to lower borrowing costs ahead of the mid-term elections in November, raising market concerns about the Federal Reserve's independence.

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

"If the Federal Reserve incorporates debt management goals into its monetary policy decisions, it will carry the meaning of fiscal dominance."

Discussions surrounding policy coordination are also heating up at the market level. Some analysts propose that the Federal Reserve could sell its approximately $426 billion in short-term securities and purchase long-term bonds with equal nominal scale of over 20 years, mimicking a "twist operation" model. This action does not change the total scale of bonds held by the Federal Reserve on paper, is more politically acceptable, and can absorb over 15% of the circulating volume of bonds over 20 years, effectively suppressing long-end yields.

However, Bloomberg analysis points out that this set of moves has inherent contradictions: the higher the proportion of short-term financing, the greater the Treasury's exposure to policy rates. If inflation forces the Federal Reserve to raise rates, interest costs will reset at a faster pace; if the Federal Reserve hesitates due to concerns about fiscal costs, the market will punish its independence with a higher term premium.

It is noteworthy that both Walsh and Bessenet are students of hedge fund billionaire Stanley Druckenmiller, and reports suggest they meet regularly and have a good relationship. However, investors and economists generally point out that the priorities and operational logics of the two, each representing their respective institutions, are becoming increasingly difficult to reconcile. The 30-year Treasury yield of 5% is seen as a key threshold, and Walsh's statement this Friday will determine the market's pricing direction regarding this policy rift.