Fed Chairman Kevin Warsh travelled to Europe just over a month into his job and went out of his way to foster good relations with officials there, leaving a predominantly positive impression, the sources said.
In his debut Jackson Hole conference as Fed leader, he also posed for a customary photo with Bank of Canada Governor Tiff Macklem, a small but still notable gesture since Trump is now engaged in an escalating and bitter trade war with Canada.
Yen intervention and bond buybacks raise concern
Recent U.S. Treasury interventions to prop up the Japanese yen and to lower longer-term U.S. borrowing costs were particularly concerning as they foreshadowed more intervention and breaks with norms, the officials, who asked not to be named, said.
After the August 1 yen transaction, U.S. Treasury Secretary Scott Bessent confirmed that the Treasury had sold euros for the Japanese currency and said he reassured central banks in the region that the move was "just a reallocation of resources." On Friday, he said that the foreign exchange assets to buy yen came from the Treasury's Exchange Stabilization Fund.
But European officials were especially annoyed the U.S. did not give them a customary heads-up that euro sales were part of the transaction, the sources said.
"That was infuriating," one of them said. "You always pick up the phone and give heads-up."
"The message to me is that the U.S. does whatever it wants."
Others were more forgiving and said the transaction was so unusual that it may have been an honest oversight.
Spokespeople for the European Central Bank and the Federal Reserve declined to comment.
A U.S. official said the U.S.-Japan intervention was undertaken to counter disorderly movements in the yen and to support stability in global financial markets.
"It was not directed at anyone else," the official said. "Treasury maintains close and ongoing communication with our international counterparts, but we do not comment on the operational details of those discussions."
The sources also said that Bessent’s plan to increase buybacks of longer-dated bonds -- transactions that may need to be financed by issuance of more shorter-term maturities -- was also a concern to European central bankers because, like the yen purchase, it indicates the administration was willing to take unusual measures to cap borrowing costs.
"These interventions normally offer just temporary relief," a second source said. "But they are clearly worried. So what is next? Will they put pressure on the Fed to start buying bonds on the market?"
While the Fed is the sole U.S. monetary policymaking body, independent in that mission by design from the elected administration, the sources said Trump has shown he is willing to go to extraordinary lengths to get his will across.
Their concern was that this could then set off upheaval in markets that would go far beyond the U.S.
The U.S. official responded by repeating earlier statements that the increased long-end bond buybacks were aimed at providing greater liquidity in longer-dated sectors where Treasury gets high-quality buyback offers.
"They are not monetary policy or an effort to impose a cap on interest rates," the official said.
On Thursday, however, a U.S. Treasury official had told reporters the Treasury was "really focused on bringing those long-end yields lower" because they had risen above what the department viewed as "fair value."
Fed officials try to reassure European counterparts
Europe's central bankers are leaving an annual getaway with their U.S. counterparts far from reassured that long-standing norms in global cooperation remain intact and worried that more turmoil is ahead for an already testy relationship with Washington, sources familiar with the discussion said.
Federal Reserve policymakers went out of their way to ease their counterparts' concerns this week, promising to honor all of their commitments.
But, given the separation between the central bank and the administration, they could offer no guarantees against sudden policy shifts by President Donald Trump, more than half a dozen officials on the sidelines of the Kansas City Fed’s annual Jackson Hole Economic Symposium said.
Swap lines and global financial backstops remain a worry
Another of the Europeans' worries was that political meddling could eventually involve the dollar liquidity backstops provided by the Fed to the world's biggest central banks, considered a cornerstone of global financial stability, some of the sources said.
These swap lines ensure that commercial banks around the world retain their access to U.S. dollars, especially in moments of financial stress.
The Fed renews this facility year after year on the premise that it actually safeguards U.S. interests and markets, since overseas banks in moments of global market upheaval could otherwise be forced to dump U.S. bonds.
"But rationality doesn't always prevail with this administration," a third source said. "When they run retaliatory trade policies with their closest allies, Trump could just say, 'Hey, they're ripping us off' and the swap lines could be gone overnight."
The sources said there has not been even a hint that these backstops are in danger, and they still expected them to remain unchanged. The swap lines are authorized by the Federal Open Market Committee itself and operated exclusively by the Fed, not the administration.
"Decisions concerning Federal Reserve facilities and swap-line arrangements rest with the Federal Reserve," the Treasury official said. "Nothing Treasury has announced regarding either yen operations or debt buybacks suggests otherwise."
The official added that Bessent looked forward to discussing financial stability issues with G20 finance ministers and central bank governors in the coming days in Asheville, North Carolina, seeking to further press the administration's agenda on isolating Iran, fostering growth and reducing global imbalances.
TLT•
