For charts and live links, see discussion.fool.com - Control panel warsh bessent interest rates

In an ideal world, the financial infrastructure of our economy should hum along smoothly. The Chair of the Federal Reserve and the Treasury Secretary should sit anonymously in their offices, monitoring but not actively manipulating the economy.

In particular, they should not manipulate the economy at cross-purposes to each other.

Last week, Treasury Secretary Bessent and Fed Chair Warsh made front page news. They manipulated interest rates in opposite directions.

Bessent sold short-term T-bills (which pay for government deficits) in order to buy long-term Treasury bonds (whose yields have been spiking recently). It’s important to note that this action was revenue-neutral. Unlike the Fed, Treasury can’t create fiat money out of thin air. Bessent’s motivation was to reduce interest payments on the federal debt. This was an unplanned re-weighting of government debt toward a shorter duration. If short-term interest rates rise, the T-bills will quickly turn over to the higher rate.

Meanwhile, Fed Chair Kevin Warsh, who has specifically rejected forward guidance, gave a speech that strongly hinted the Fed will need to raise the fed funds rate since the current rate is not restrictive and inflation has been running above the Fed’s goal for 5 years.
Board of Governors of the Federal Reserve System
Keynote remarks by Chairman Warsh at the 2026 Jackson Hole Economic Policy...

Thank you. It's great to be here again and to see so many familiar faces. I've been looking forward to this weekend—what better place to mark my 100th da

The Fed controls the overnight fed funds rate. Barring an emergency, the Fed doesn’t buy longer term bonds (QE) which would suppress the long term bond yield.

Treasury’s move to lower the 30 year bond yield works against the Fed’s efforts to slow inflation by slowing the economy. Worse, it was stupid (because the small amount bought was a drop in the ocean) and bond yields rose after a temporary drop.

T-Bill and 2 year yields spiked after Warsh’s speech. That won’t make Bessent happy since his job is to reduce interest payments as much as possible.

The entire yield curve rose, especially in the < 10 year duration. I was able to buy an A+ rated muni maturing in 3 years yielding 5.6%.

The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, showed that conditions are very loose and getting looser.

The Atlanta Fed’s Third-Quarter GDPNow Estimate for 2026:Q3 is 4.6%. That’s a very high prediction which would lead to increased inflation. The Cleveland Fed’s inflation forecast is, as usual, higher than the Fed’s 2% target. Warsh sees the Fed’s Job One as bringing inflation down.

The options market sees a 60% chance of a fed funds rate hike before the November midterm elections and no chance of a cut. Everyone can see the high inflation and high growth. The Fed would totally lose credibility if it cut the fed funds rate. It should have raised the rate months ago and everyone knows it. The only opponent is President Trump - and he doesn’t hesitate to browbeat and viciously insult anyone who opposes him.

The stock indexes stabilized. The Fear & Greed Index was neutral.

The price of oil and gasoline have stabilized. Diesel oil is rising, which will pressure inflation higher. Gold and silver pulled back slightly from their recent rise. Copper has been rising steadily, probably due to AI data center wiring needs. USD stabilized near the bottom of its 2026 channel.

The METAR for next week is sunny. The world is wagging on with all its usual problems. There’s no sign of a crisis next week. All the problems are long-term.
Wendy

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