Bessent Wants to Bring Treasury Yields Down. Warsh Could Complicate the Plan.

Federal Reserve Chair Kevin Warsh is facing an early test of the central bank's independence as Treasury Secretary Scott Bessent steps up efforts to influence a turbulent U.S. government bond market.

The issue is becoming increasingly relevant as the Treasury looks for ways to bring down long-term borrowing costs, according to CNBC. While Bessent has tools that can affect the supply and structure of government debt, a sustained attempt to push Treasury yields lower could eventually require cooperation from the Federal Reserve.

That possibility puts Warsh, a longtime friend of Bessent, in a politically and economically sensitive position. The Fed has historically intervened aggressively in bond markets during financial crises or periods of severe economic weakness, not simply because Treasury officials believe yields are too high.

So far, there is no indication that the Fed intends to intervene. The Treasury, however, is already taking action. On Wednesday, the department announced plans to at least double the maximum size of its long-dated Treasury buybacks, increasing them from $2 billion to at least $4 billion per operation. Those purchases would be offset through additional issuance of shorter-maturity debt.

The announcement initially pushed the 10-year Treasury yield lower, although much of that move had reversed by Thursday. Bessent also suggested the Treasury could do more." We have a big toolkit, so we'll see," Bessent told CNBC on Thursday.

Bessent said part of the strategy was to signal that Treasury officials believe current yields do not accurately reflect economic fundamentals. But some of the most powerful tools for influencing the yield curve remain at the Fed. "There's more firepower in terms of how you manage the yield curve sitting at the Federal Reserve," Rick Rieder, chief investment officer of global fixed income, told CNBC.

That is likely to increase attention on Warsh at the Jackson Hole Economic Policy Symposium, the annual gathering of central bankers, economists and policymakers in Wyoming.

Warsh was already under pressure to clarify his approach to interest rates and the bond market. Comments following the Federal Open Market Committee's July meeting left some investors with the impression that the Fed chair was comfortable with higher long-term Treasury yields.

Former Cleveland Fed President Loretta Mester told CNBC that uncertainty surrounding Warsh's policy plans may itself be contributing to higher yields."I think part of what's happening is we don't have very much clarity yet on what Kevin Warsh's plans are," Mester said.

"We don't even have clarity on their reaction function."Warsh has expressed concern about inflation but has not clearly explained what conditions would lead him to support higher interest rates.

The uncertainty extends beyond rates to one of the most politically sensitive questions facing the central bank: where Fed independence begins and ends. During his Senate confirmation hearing in April, Warsh said Fed independence was "at its peak in the conduct of monetary policy," while suggesting other functions, including bank supervision, were not necessarily entitled to the same degree of autonomy.

Warsh has also proposed rewriting the relationship between the Fed and Treasury. In 2025, he called for updating the landmark 1951 Treasury-Fed Accord, which helped establish the modern separation between the Treasury Department and the central bank. Under Warsh's proposal, Treasury would have greater authority over major changes to the Fed's balance sheet.

That balance sheet currently contains about $6.7 trillion in financial assets. The problem for Bessent is that Warsh's previously stated balance-sheet goals could work against Treasury's effort to suppress long-term yields.

Warsh has advocated reducing the Fed's overall holdings while shifting its portfolio toward shorter-term government debt. Such a move could put upward pressure on longer-term Treasury yields, precisely the opposite of what Bessent is trying to achieve.

The Fed itself has not settled the issue. Minutes from the FOMC's July meeting showed policymakers postponing major balance-sheet decisions while awaiting recommendations from a task force created by Warsh. Its conclusions are expected late this year or early next year.

Treasury and the Fed have historically communicated about major balance-sheet changes, and Bessent indicated Thursday that he expects that relationship to continue. "I think that the Treasury and the Fed would work together if there was any change in the balance sheet, and we would adjust to any kind of runoff that they're doing," Bessent told CNBC. Neither agency told CNBC whether Bessent and Warsh have already begun coordinating.