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Wall Street analysts are anticipating something of a standoff between the Federal Reserve and the White House this week, with expectations that the Federal Open Market Committee (FOMC) meeting (concluding Wednesday) will result in a hike in the base rate. <\/p>\n
But everyone from the White House to Wall Street to the central bank will be closely watching the flexing of the bond market\u2019s macroeconomic muscle\u2014and even President Trump has been warned against testing its patience.<\/p>\n
The September FOMC meeting comes at a time when the Fed\u2019s dual mandate of maximum employment and price stability may warrant action. The latest jobs report came in stronger than expected, while inflation remains stubbornly above the central bank\u2019s 2% target.<\/p>\n
And while the Fed could be implored to \u201clook through\u201d inflation because it is driven by a supply-side shock in oil prices, doing so could call into question its credibility if it is seen as shying away from action.<\/p>\n
Indeed, following the conclusion of the June FOMC meeting this year, the bond market\u2019s reaction was clear: Longer-dated yields pushed higher, as investors absorbed a hawkish narrative from the Fed, but without the monetary policy follow-through. The central bank\u2019s base rate and bond yields generally move together over time; if bond yields spike while interest rates stay flat, it suggests investors perceive risks in the economy that policymakers are not yet addressing, be it inflation expectations or economic instability.<\/p>\n
Treasury Secretary Scott Bessent has previously signaled that the White House is cautious about pushing too hard in defiance of the bond market\u2014even if a hold or a hike in the base rate is politically unpalatable. Speaking at the Economic Club of New York in June, the Treasury Secretary was asked whether Chairman Warsh was facing increasing pressure from the executive branch to cut, even though the data suggest the opposite.<\/p>\n
Bessent responded: \u201cI am confident that the\u00a0Fed chair will \u2026 optimize the path for both inflation and economic growth. The president said at Chair Warsh\u2019s swearing-in [ceremony] that he would be independent, that he should do what he wants.\u201d<\/p>\n
\u201cLook, the president understands\u2014he and I have talked about it quite a bit\u2014\u2026 the bond market has taken out more governments than howitzers. So I believe that he has complete confidence in the Fed chair to do the right thing.\u201d<\/p>\n
While it is not the Fed\u2019s job to heed or support the bond market, Bessent\u2019s acknowledgment of its power gives the FOMC room to operate. Indeed, Bessent recently launched a multi-billion-dollar Treasury buyback scheme that briefly pushed yields lower to ensure greater market liquidity.<\/p>\n
And while the Fed\u2019s independence is legally mandated and should not be dictated by either politicians or investors, the experience of former Fed chairman Jerome Powell\u2019s final year in the top job shows how exposed the central bank can be when the White House wants a different path for interest rates. For Warsh, early in his tenure, the bond market might provide an important reminder to the administration about being seen to push the Fed too far.<\/p>\n
Wall Street takes<\/p>\n
Wall Street doesn\u2019t want to see a further uncoupling between the heavy hand of the bond market and the central bank of the world\u2019s largest economy.<\/p>\n
As Ryan Sweet, chief global economist at Oxford Economics, noted Friday, \u201cthe bond market could be losing patience with central banks sitting on the sidelines, forcing them to act.\u201d He explained: \u201cIf a central bank remains on the sidelines while inflation is running hot or energy\/supply shocks are pushing prices higher, the bond market could interpret this as policymakers accepting a higher path for inflation rather than acting to fight it, leading to higher long-term interest rates.\u201d<\/p>\n
UBS\u2019s Paul Donovan had a similar take for his clients in an audio note this morning, saying that \u201cif Warsh surprises financial markets, it risks reawakening accusations of being a \u2018sock puppet\u2019 and raising credibility questions which would require a risk premium in bond pricing. That would raise real borrowing costs for the government and private sector, with implications for investment and trend growth.\u201d<\/p>\n
#Scott #Bessent #Kevin #Warsh #Bond #market #governments #howitzers<\/p>\n","protected":false},"excerpt":{"rendered":"
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