Treasury's Expanded Bond Buybacks Work Against Warsh's Inflation Fight

The United States Treasury and the Federal Reserve are now pulling in opposite directions on the price of long-term money. Treasury Secretary Scott Bessent has increased purchases of outstanding long-dated government debt, a step the Financial Times reports threatens to undermine Federal Reserve Chair Kevin Warsh's attempt to bring inflation down.

Treasury announced the larger operations on August 19 after a selloff pushed yields to levels the department considered uncomfortable, doubling buybacks to about $4 billion per operation. The relief did not last. The 30-year yield rebounded to 5.247% within 24 hours, reversing the initial decline and suggesting that private buyers are demanding more compensation to hold long-term US debt than the department wants to pay.

The institutional conflict is unusually direct. Warsh left the Federal Reserve Board in 2011 in opposition to quantitative easing, the policy of buying long-dated bonds to hold yields down, and he has argued since that open markets, not officials, should set the term structure of interest rates. Treasury buybacks are not quantitative easing in the strict sense, because the department swaps existing securities rather than expanding the monetary base. The effect at the margin still points the same way, as Axios noted: one part of the government is trying to hold down the long yield while another tries to restrain credit.

That is the mechanism sound-money economists have always flagged. When the fiscal authority finds the market's price for its borrowing too high, the temptation is to manage the price rather than the borrowing. The cost does not disappear. It reappears as inflation, as a weaker currency, or as a still higher term premium once buyers conclude the yield is administered rather than discovered.