Fed officials affirm independence after Treasury expands longer-term bond buybacks
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Two Federal Reserve officials said Thursday the central bank's monetary policy remains independent of Treasury debt-management decisions even as the Treasury expanded longer-term bond buybacks. St. Louis Fed President Alberto Musalem said financial conditions remain accommodative and indicated he was leaning toward a rate increase at the September 15-16 meeting.
Key Facts
- St. Louis Fed President Alberto Musalem said on Aug. 20 the central bank sets monetary policy independently of Treasury debt management and fiscal policy.
- Musalem said he was leaning toward a rate increase at the September 15-16 Federal Reserve meeting after the July 28-29 session left rates at 3.50%-3.75%.
- Treasury Secretary Scott Bessent said the larger long-term buyback program is intended to signal that Treasury yields do not reflect underlying economic fundamentals.
- Long-term Treasury yields rose again on Thursday after dropping sharply Wednesday, indicating the Treasury intervention's impact was short-lived.
- San Francisco Fed President Mary Daly said she was not worried about Treasury debt issuance patterns.
Fed Officials' Response
Two Federal Reserve officials expressed caution on Thursday when asked about Treasury debt-management changes and their effect on monetary policy. St. Louis Fed President Alberto Musalem told CNBC the central bank focuses on the labor market and inflation and sets policy independently of debt management or fiscal policy. Musalem said the Fed should have raised rates at its July 28-29 meeting instead of holding them at 3.50%-3.75% and was leaning toward a hike at the September 15-16 session. San Francisco Fed President Mary Daly said she was not worried about Treasury debt issuance patterns.
Treasury Buyback Shift
The Treasury on Wednesday shifted to a more aggressive pace of buybacks of longer-term government debt. Treasury Secretary Scott Bessent told CNBC the bigger buyback program is partly meant to signal that yields do not reflect underlying fundamentals. Long-term Treasury yields recently spiked on concerns about rising U.S. debt, inflation that remains above the Fed's 2% target, and investment flows. Yields dropped sharply Wednesday but rose again Thursday, showing the intervention's impact was short-lived.
Financial Conditions and Rate Path
The Treasury intervention creates potential confusion in financial markets over which institution is the main driver of financial conditions. Musalem described U.S. financial conditions as 'pretty accommodative'. Financial conditions are supportive of economic growth and are not working to lower price pressures toward the Fed's 2% target. Bessent downplayed conflict, saying any Fed rate decision is separate from Treasury actions and the two institutions would work together on any change to the Fed balance sheet.
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Fed officials affirm independence after Treasury expands longer-term bond buybacks
