Already have an account? log in
This article is FREE for you
Create a free account and join institutional investors, analysts and strategists from the world's largest banks
By submitting your email address you agree to receive communication by email
Warsh Storms Back, Leapfrogs Hassett In Fed Chair Betting Odds
"As Fed Chair, how frequently would you consult with the president when he says he wants his voice h
OR, subscribe now for unlimited access
By submitting your email address you agree to receive communication by email
By submitting your email address you agree to receive communication by email
Regardless of who is chosen, it is highly probable the long end will likely be unwieldy. Fiscal policy is currently too easy and about the get easier. Monetary policy is about to blast massive amounts of liquidity into the system. And the risk in Treasuries that no one seems to be talking about is stable coins. What happens when stable coins (the emergent largest buying cohort) stop buying because US Treasuries have become less stable or worse they start selling or are forced to do either due to legislation (a likely priority of a likely Dem controlled Congress in 2027)?
The Fed is now a major buyer of short treasuries as its mortgage book rolls off. Ironic that the Fed is a major funder of our deficit financing. Additionally Fannie Mae and Freddie Mac are building up their balance sheets by keeping new mortgages and bonds on balance sheet rather than selling them, presumably in advance of a return to public ownership. Together along with the recent reduction in rates we now have supercharged QE. No holding us back now.
“… we now have supercharged QE.” Fed buying in Bills and ultra-short paper isn’t QE. The goal isn’t to compress risk premia. I understand the temptation to traffic in that narrative — and God knows I could sell it in hyperbolic headlines — but it’s just not true.
QE is buying long bonds to force down their rates. Buying bills is just reserve management.
For now . . . I do think there is a plausible future (“plausible” in the current Bizzaro World where the Mar-A-Lago Accord guy sits on the FOMC) where the Fed forces short rates to very low, Treasury shifts issuance even more toward bills, the USA’s interest cost is thereby lowered, at the cost of having to roll over $20TR+ every six months. If one of those refinancings stumbles, who’s to say the Fed wouldn’t be ordered to step in?
I wouldn’t doubt this is the thinking of the administration. It sounds like a free lunch to me, and you know what they say about a free lunch, there is no such thing.
I would expect the irresponsible fiscal policy to push the short end to the largest dislocation from the Fed funds possibly ever. Too much supply, not enough demand.
I also think the Dems targeting stable coins will be an effort to force/exacerbate (with the admin push ing more funding to the short end)
this issue to pin it on the Trump admin before a Dem President takes office in 2028. Of course they will sell the legislation as a means to stop the USD being leveraged to finance illicit global activities via stable coins because stable coins as a vehicle is intentionally designed to be exactly that. I wouldn’t be surprised if the whole idea for stable coins came from the Kremlin in the first place. The Trump admin has been a Russian puppet state since day 1.
If Warsh thinks his former colleagues on the Fed have a credibility gap, just wait to see how he’s regarded after a year in service of the President.
Support for crypto is bipartisan now. Some hypothetical anti-crypto future president is going to have a near impossible time putting that particular genie back in the bottle (I prefer to keep my genies in bottles, it’s much more convenient than lamps, to say nothing of the fire hazard).