The Treasury Department just pushed down long-term US bond yields. That could make Kevin Warsh’s job harder.

Treasury Secretary Scott Bessent took action Wednesday to lower long-term government bond yields, a move that complicates Federal Reserve Chairman Kevin Warsh’s job and may even force him to act more aggressively to raise interest rates.

US government bond yields are skidding after the Treasury said it would “at least double” the amount of 10-year, 20-year and 30-year Treasury bonds it buys back. The operation will begin on Sept. 9 and remain effective through Nov. 4.

The move comes after the 30-year Treasury yield hit its highest level in 19 years earlier this week, amid investors’ concerns over higher fiscal deficits, heavy AI borrowing, and higher inflation that has pushed up borrowing costs globally.

That has implications for the central bank. During his press conference on July 29, Warsh repeatedly pointed to bond yields that had shot materially higher, suggesting that the Fed welcomed the higher yields as a way to raise borrowing costs and tighten policy through markets, rather than the Fed having to raise short-term rates itself. The Fed raises or lowers its short-term interest rate to influence other bond yields, which in turn dictate borrowing costs for consumers and businesses.

“Chairman Warsh is in a very uncomfortable position,” Wilmington Trust senior bond portfolio manager Wil Stith told Yahoo Finance in an interview on Wednesday following Treasury’s announcement. “The market was leaving with this notion that we don’t necessarily have to see a hike in the Fed funds rate because the longer end of the bond market is doing the work for the Fed.

“Well, now we have the Secretary of the Treasury sort of rolling that back.”

Stith noted that the determining factor for the Fed will be where inflation heads from here. If inflation stays flat or rises, the Fed will be forced to raise interest rates more aggressively to counteract the expansionary impact of the Treasury’s actions to push down yields. That could force the Fed to raise rates rather than leave them unchanged.

“We have the Fed and the Treasury basically working in sort of opposite directions,” said Stith. “I think that’s just going to require the Fed, which has the larger sandbox, to sort of adjust the target Fed funds rate more so than it would have.”

Joe Brusuelas, chief economist at RSM, also said the Treasury’s actions make Warsh’s job of bringing inflation back down to 2% much more difficult. Warsh strongly prefers letting the market price interest rates naturally without government interference, he noted. Up until now, investors had been doing exactly that — repricing long-term debt and demanding a higher yield to hold US bonds.

“Warsh clearly prefers market-derived rates absent Fed direction,” he said. “This is exactly the type of constraint that Warsh has long argued was lifted by the past two decades of monetary policy.”

One question now is whether the buybacks will have a long-term impact on keeping a lid on the rise in Treasury yields or whether the effect will be short-lived. Wall Street experts are skeptical that the Treasury can keep interest rates down for long. The fundamental forces pushing yields higher simply haven’t changed.

“The instant impact looks striking …but we are skeptical that this operation will have a material impact over any more extended period,” said Krishna Guha, head of central banking strategy for Evercore ISI.

“We think the intervention can help crowd in potential buyers tempted by the prior run-up in yields and force some near-term short-covering, while discouraging investors from going max short in the future for fear of being ambushed again.”

But to push down bond yields sustainably, Brusuelas said, means scaling back government spending.

“Right now, given the populist economic frameworks preferred by both parties, it’s simply not in the cards,” he said. “Thus, steps like that taken this morning will prove to be a temporary salve to an open financial wound of our own making.”

A number of factors are converging to raise yields, namely a higher fiscal deficit, inflation running above the Fed’s 2% target, a weaker dollar, and soaring bond issuance by technology companies to finance data centers and other artificial intelligence build-out, which is competing with government bonds.

Showdown in Jackson Hole?

Stith says Bessent has opened Pandora’s box.

“How much is he going to do to bring down longer-term rates?” he said. “The question is how much gunpowder is the Treasury Secretary going to employ to counteract higher interest rates? And there’s really only so much that he can do as opposed to the Federal Reserve … His sandbox, while it’s big, it’s not as big as the Fed.”

Stith questioned whether this action would be followed by a reduction in the size of debt auctioned by the Treasury, or whether the size of long-term Treasurys being bought back would increase again to $8 billion.

Treasury increased the size of its buyback operations to a maximum of at least $4 billion Wednesday from the previous $2 billion.

The buybacks complicate an already complex economic landscape for Warsh and the rest of the Fed. The immediate fallout will land next week at the Fed’s annual economic symposium in Jackson Hole, Wyo., where Warsh is scheduled to deliver a high-stakes keynote address.

“I think he’s probably going to have to rewrite his speech,” said Stith. “He likely wanted to focus generally on slowing inflation without offering forward guidance. But do the Treasury’s actions require him to be either more assertive or change his non-forward guidance policy to any degree?”

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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