September 10, 2026
The summer of 2026 is proving to be quite interesting relative to the Federal Reserve and the U.S. Treasury department. The downstream implications for markets and their participants will certainly be interesting in light of the opposing messaging radiating from these two entities.
Kevin Warsh took over as Chairman of the Federal Reserve in late May. In his first FOMC press conference in June, he set a new course for the Fed relative to their overall approach of the previous couple of decades.
What has become the norm for market participants, as well as the citizenry, is the expectation of forward guidance from the Fed.
This essentially boils down to everyone watching the Fed and then taking their cues accordingly on the expected near-term interest rate policy stance. With the backdrop of their ongoing forward guidance approach, markets became Fed-centric.
That is, everything in markets and economics became about the Fed. What does the Fed think? What will the Fed do? How does the Fed process X data points?
Upon taking the helm, Warsh put an end to this forward guidance policy as he laid out in the June FOMC press conference. In place of this, he essentially offered that collective market participants should be the focus.
If you are a consistent reader of these editions, you may note that we are consistently looking at collective market participants to gauge what they are “seeing” downstream through their market positioning and the pricing of various asset markets. There is a collective wisdom there worth monitoring.
Warsh is essentially offering that collective participants have an abundance of knowledge, and if they are the center piece, the Fed could in turn decipher what they are messaging rather than the other way around, and through this, Fed policy decisions would be better for it.
This forward guidance change is important enough for a direct quote from the June FOMC presser:
CHAIRMAN WARSH. So I think financial markets perform best when they react to incoming data. I think they—the financial markets work less efficiently when they ask a question: How will the Federal Reserve react to that incoming information?
The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, the more financial markets can price what they believe is the most likely and what are the tail risks.
Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it.
Transcript of Chairman Warsh’s Press Conference -- June 17, 2026
Take note of the last paragraph above. He gives a powerful message speaking to the circular Fed-centric process that forward guidance has devolved into.
For the Fed to drop forward guidance and essentially offer, we got nothing, if you will, but rather we (the Fed) are looking/watching you (market participants and economic participants) for what you are messaging via your behavioral pricing of various markets is a monumental shift. Through this, we (the Fed) will take in and respect the collective wisdom you radiate from said behaviors and pricing.
This approach is going back in time when collective market participants were expected to do the proverbial work rather than sitting back and watching the Fed, i.e., Fed-centric market analytics.
And then we have the Treasury Department
What is a treasury secretary to do while overseeing mountains of debt with ongoing fiscal policies offering more new debt will be coming? Keep in mind the treasury secretary position comes with making sure the debt (existing and incoming) finds a buyer/holder?
Continuing with some backdrop for context, this is to be done in a way that hopefully brings with it some level of an interest rate (that the treasury pays) that doesn’t gum up the economic system as a whole in light of escalating interest rates within the bond market.
A bond market whose participants are very smart and are not interested in holding treasury debt paper at the low interest rates that D.C. officialdom desires in light of overall fiscal policy and price inflation issues.
The Secretary could adjust budget policies that would reduce the size of new incoming debt, which would in turn send a message to global bond market participants that the treasury department is serious about straightening out the multi-decade approach of U.S. fiscal policy largesse.
Such a policy would incentivize said participants to purchase treasury debt, giving an underlying bid to them, and in so doing, aiding in holding the line of interest rates from escalating further.
The problem? The secretary of the treasury does not have that power. Only the executive and legislative branches possess that power, which neither, in recent decades and up to the current day shows any serious interest in addressing.
With this, Secretary Bessent has moved in the opposite direction, as the summer of 2026 has unfolded, of what the new Fed chairman is offering relative to listening to collective market participants and setting policies accordingly.
In this case, bond market participants have been messaging to D.C. officialdom that fiscal policy must be reined in. Rather than listening and adjusting policies accordingly, such as the new Fed chairman is offering for monetary policy, the treasury department is working to kill the message rather than heed the message.
Again, because Bessent has no power to change fiscal policy course, he is employing paper games in an attempt to twist the proverbial arms of bond market participants into doing what he wants them to do, which is, don’t sell treasuries and preferably buy some.
This message is sent, from the treasury to bond market participants, by ordering larger buybacks of the longer-oriented maturities (10 and 20-year maturities) in a paper game attempt to twist arms with bond market participants.
With the above in mind, there are two very important things to understand with this paper game approach.
First, the size of the buybacks is miniscule relative to the size of the market Secretary Bessent is trying to control. Think of a bee-bee gun hitting an elephant. Second, ultimately, the buyback’s source of funds is more debt. Digest that fact dear reader.
As shared in our previous edition, there is no rainy-day fund at the Treasury waiting to be tapped for such buybacks. The U.S. Treasury operates in a perpetual deficit. There are tax receipts and additional debt to fill the deficit of overspending relative to tax receipts.
Dollars spent on buybacks will ultimately be replaced with more debt. A true paper game. This is not a true solution for fixing escalating interest rates within the treasury bond market.
While the Fed has moved to observing collective market participant messaging in aiding policy decisions, the Treasury has moved toward arm-twisting treasury bond market participants as a way to get longer maturity interest rates to go lower.
For bond market participants’ sake, the smartest market by the way, as of this writing, they pushed longer maturity interest rates higher after Secretary Bessent announced today a larger than anticipated buyback program.
The above will be quite interesting as we round out the remainder of 2026.
Expect elevated interest rates to remain if they do not proceed higher. Treasury participants are not impressed with paper games; they need substantive fiscal policy/inflation change, or they need higher interest rates. One, or the other, that continues to be their message.
I wish you well….
-Ken from Mind Your Stops