Trump Loyalists Clash Over Interest Rates

Two influential figures in the US economy are locked in a high-stakes battle over interest rates. Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh, both loyalists of former President Donald Trump, have been quietly engaging in a figurative boxing match.

Bessent threw the first jabs by applying pressure to Japan in June, encouraging it to reduce spending and stabilize its currency. This move was aimed at preventing Japan from selling US Treasuries, which could put downward pressure on bond prices and yields.

The Treasury Department followed up with a more aggressive move in August, announcing plans to double the size of its buybacks of long-dated Treasuries. However, this effort has so far failed to stem the rise in yields.

Warsh, meanwhile, has been pushing for interest rate hikes to combat inflation, which he considers too high. At the Jackson Hole Symposium, he stated that inflation is running above the Fed's 2% target and urged a focus on prices. The Fed subsequently raised rates at its September meeting, bringing the benchmark overnight rate to a range of 3.75% to 4.00%.

The Treasury has built up its General Account to nearly US$950 billion, giving it significant capacity to buy bonds and suppress yields. However, the Fed's aggressive approach to inflation control has raised questions about whether Warsh can withstand pressure from Bessent and Trump, who wants interest rates below 1%.