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The case for Fed involvement goes to firepower. Treasury interventions are constrained to the money that it has on hand. The Fed, in contrast, can create money, allowing it in theory to purchase a limitless amount of bonds if required.
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Buying bonds in large size — called quantitative easing — is now an established part of the Fed's tool kit, first used during the 2007-2009 financial crisis and again in the COVID-19 pandemic.
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Economists largely agree past purchases have helped calm distressed markets, signaled the Fed’s commitment to stimulative monetary policy, and likely kept borrowing costs lower than they would otherwise have been.
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During and emerging from World War II, the Fed had actively worked to cap borrowing costs at the Treasury's behest. But it stopped doing so following the Treasury-Fed Accord of 1951, which separated government debt management from monetary policy.
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Buying bonds now at Treasury’s behest would not only upend that long-standing pillar of Fed independence, it would clash with the Fed’s effort to bring inflation back down to its 2% target, which markets expect mean one or more increases in the Fed's short-term policy rate.
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Moreover, buying bonds in enough size to impact yields would also cause a big expansion in the Fed’s balance sheet, and Warsh wants Fed overall holdings, now at $6.7 trillion, to be smaller.
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Also arguing against Fed intervention is a sense among some at the central bank that higher yields exist for legitimate reasons.
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New York Fed President John Williams told CNBC on September 2 that rising yields are “more of a reflection of the strength of the economy” coupled with aggressive technology investment levels. He also shrugged off the Treasury’s interventions as a factor for Fed policy and noted what the department is doing “doesn't complicate my job or our job making monetary policy.”
TLT•
