Warsh guards a line the US Treasury has already crossed

Kevin Warsh has spent his first three months as US Federal Reserve chair refusing to tell markets what he plans to do.  

He speaks at the Jackson Hole Economic Policy Symposium on Friday under pressure to explain something more basic, which is where the US Treasury's authority over the bond market ends and the Fed's begins. 

That question sharpened after US Treasury Secretary Scott Bessent doubled the maximum size of his department's long-dated buyback operations to at least US$4bn last week, an intervention Wealth Professional reported failed to hold, with the 10-year note closing Thursday at 4.704 percent and the 30-year bond at 5.248 percent.  

Bessent told CNBC the operation could run larger still, describing part of the exercise as signalling that yields do not reflect underlying fundamentals. 

"We're slowly moving to the point where the logic of populism is going to insist that the central bank support fiscal objectives," Joseph Brusuelas, principal and chief economist at RSM US, told CNBC.  

He said the intervention will make Warsh's job harder by clouding the market signals the chair has said he wants to read directly. 

Warsh has left himself room on the question.  

He told his US Senate confirmation hearing in April that Fed independence is at its peak in the conduct of monetary policy, a formulation implying limits elsewhere, and he has not fully specified where those limits sit, CNBC reported.  

He proposed in 2025 to revise the 1951 Treasury-Fed Accord, the agreement that secured the American central bank's political independence, so that the treasury secretary would have to find any major change to the Fed's balance sheet acceptable. 

The Fed's own advisory apparatus has warned against exactly this drift on the fiscal side. 

Bills now make up 22.2 percent of outstanding US Treasury debt, above the roughly 20 percent ceiling recommended by the Treasury Borrowing Advisory Committee, according to CNBC, and the committee has recorded in its minutes that issuance rather than buybacks should be the primary tool for managing the debt profile. 

Academic economists polled for the Financial Times by the University of Chicago's Booth School of Business put the cost of the ambiguity in numbers.  

More than 60 percent said credibility concerns had a substantial impact on the rise in American long-term yields since Warsh was nominated in late January, and nearly 60 percent said the Fed will now take longer to reach its 2 percent target than they expected at his confirmation in mid-May.  

"The communication strategy is driving a loss of Fed credibility," said Eric Rosengren, former head of the Boston Fed. 

Not every respondent was critical.  

Jon Faust, a Johns Hopkins fellow who advised former chair Jay Powell, told the FT that Warsh has largely overcome fears he would defer to White House pressure and has not caused internal turmoil at the US central bank. 

Strategists expect Friday's address to stay philosophical, which is the risk for anyone holding long duration.  

"More of the same, I think, would be seen as a disappointment to the markets, which could exacerbate the long-end selloff that we have seen," Molly Brooks, US rates strategist at TD Securities, told Bloomberg.  

Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Company, told the same outlet that the fundamental drivers behind higher long-term rates remain in place. 

Canadian clients hold this risk through the American long end, not through domestic policy.  

National Bank of Canada said in its July fixed income monitor that Canada-US rate differentials have reached their limit and short-end Canadian rates are set to underperform, while Government of Canada bonds stay better supported further out the curve than US Treasuries.  

The bank forecast 30-year Treasury yields above 5 percent for the foreseeable future, partly because Warsh's balance-sheet task force is unlikely to offer the long end much support. 

RBC Global Asset Management recommended that Canadian investors hold overweight positions in non-Canadian bonds, according to its spring outlook.  

Most markets outside Canada offer higher yields.  

The firm expects the Bank of Canada to stay at 2.25 percent for another year.