Warsh Refuses to Define Boundary Between Fed and Treasury Authority

US Federal Reserve Chair Kevin Warsh has been under pressure to clarify the authority of his institution and the US Treasury Department over the bond market. At a recent speech, Warsh failed to specify where the Treasury's authority ends and the Fed's begins, leaving investors uncertain.

The confusion began when US Treasury Secretary Scott Bessent doubled the maximum size of the department's long-dated buyback operations to at least $4 billion last week. The move was seen as an intervention in the bond market, which failed to hold, with 10-year note yields closing at 4.704 percent and 30-year bond yields at 5.248 percent.

Warsh's reluctance to clarify the boundaries between the Treasury and Fed has sparked concerns that he may be willing to compromise the central bank's independence. The ambiguity has also led to a loss of credibility for the Fed, with over 60% of polled economists attributing the rise in American long-term yields to credibility concerns.

Warsh proposed revising the 1951 Treasury-Fed Accord, which secured the American central bank's political independence, to give the treasury secretary more power over the Fed's balance sheet. However, this move has been criticized by experts, who warn that it could undermine the Fed's ability to set monetary policy independently.