Wash just said that the Federal Reserve will watch "the market's face," and Treasury Secretary Becerra publicly declared right after that "the market pricing is wrong"! For Wash, who is about to take the stage at Jackson Hole, he must give the market an answer: stand with the White House or the Federal Reserve?

Source: Jinshi Data

The intervention measures aimed at supporting the U.S. bond market by Treasury Secretary Becerra last Monday are still causing ripples on Wall Street, with his artificially suppressed yields widely criticized by Wall Street as undermining the Federal Reserve's efforts to quell the current surge in inflation.

The Trump administration hopes to lower borrowing costs as much as possible before the crucial midterm elections in November this year. This has raised deep concerns in the market: if the Treasury's buyback operations cannot effectively control yields, the Federal Reserve may also face political pressure for intervention.

Harvard University professor and former chairman of the White House Council of Economic Advisers during the Obama administration, Jason Furman, issued a stern warning on this. He pointed out that once the Federal Reserve compromises to assist in debt management when formulating monetary policy, "it will carry a sense of fiscal dominance."

The financial market has shown extreme distrust towards the Treasury's actions. Although the actual impact of the current intervention on bond yields is minimal, once it successfully lowers core borrowing costs like mortgages, it will undoubtedly stimulate the economy.

Federal Reserve Chairman Wash and Becerra's mutual mentor, hedge fund legend and billionaire Druckenmiller, harshly criticized this policy in his column in The Wall Street Journal this week. He characterized the Treasury's plan to spend at least $4 billion to repurchase long-term government bonds as a complete "mistake." He bluntly stated:

"This is not liquidity management, but price management, and this is a far greater error than the $4 billion figure suggests."

Several leading financial institutions have also followed suit with statements. PGIM Credit's co-CIO Greg Peters labeled this move as "a self-restraining, counterproductive strategy" and held an extremely pessimistic view of the official reasons for the intervention.

Morgan Stanley Wealth Management's chief investment officer Lisa Shalett offered similarly sharp criticism. She stated that intervening simply because of dissatisfaction with rising yields is unconvincing, and it resembles Washington admitting anxiety about debt sustainability.

"And you wouldn't want to see an unpredictable, whimsical Treasury." Shalett warned that if Becerra stubbornly attempts to manipulate the yields of the world's most important bond market, it is undoubtedly a serious overdraft of official credibility.

Federal Reserve in a Dilemma, Wash's Speech Becomes Market Focus

The Treasury and the Federal Reserve's "contradictory" strategies have concentrated all external pressure on Federal Reserve Chairman Wash. This Friday, he will deliver a crucial speech at the Kansas City Federal Reserve Economic Symposium in Jackson Hole, Wyoming.

Evercore ISI vice chairman Krishna Guha revealed that the Treasury's overstepping not only makes investors uneasy but "also makes the members of the Federal Open Market Committee (FOMC) uneasy." The divergence of priorities between these two major macro-management departments has become completely public.

In the July FOMC vote, three members of the Open Market Committee clearly supported interest rate hikes. Several regional Federal Reserve presidents subsequently expressed their support for raising borrowing costs by 25 basis points to cope with the current severe inflation situation.

Recent conflicts involving the Trump administration in Iran have caused sharp increases in costs for businesses and consumers, further heightening financial and economic risks. The market is urgently demanding that Wash calm emotions at this meeting and clearly state the triggering conditions for future rate hikes.

Wash's previous policy advocacy fundamentally contradicts the current practices of the Treasury. He has consistently called for investors to closely watch economic data and market prices and has tried to abandon forward guidance in communication.

Just last month, Wash clearly stated that higher yields reflect the economic reality, indicating that the market needs higher borrowing costs. He emphasized at that time that the Federal Reserve, under his leadership, is "striving not to intervene in market signals." However, the Treasury's actions have put the Federal Reserve in an extremely awkward position. Guha admitted that when the Treasury Secretary publicly claims that the market pricing is wrong and intervenes forcefully, it becomes very difficult for Wash to defend the natural price formation mechanism in the bond market.

Regarding the upcoming speech on Friday, the market expects Wash to take this opportunity to explain the logic behind his streamlined communication style. Westwood fixed income portfolio manager Scott Barnard pointed out the biggest concern among investors at present:

"Wash's decision to abandon forward guidance, coupled with Becerra's intervention to suppress long-term yields, gives the impression that the Federal Reserve and the Treasury are 'going in the opposite direction.' For Wash, will he be able to prove that he has enough ability to steady the course in this complex policy tug-of-war and lead the Federal Reserve to complete a five-year battle against inflation?"