Who will influence the world's most important Intrerest Rate? Besant 'usurps' Powell

The U.S. Treasury's strategy of leaning toward increased short-term bond issuance is materially undermining the Fed's independence. This article is from Wall Street Insight and has been compiled, compiled and written by ForesightNew. (Synopsis: Trump writes a book of "Flying Fed Powell", WSJ: White House announces new FED chairman bypasses restrictions six months in advance) (Background supplement: Fed microphone: Trump presses two Fed officials to support interest rate cuts, Ball becomes the biggest loser) The U.S. Treasury's strategy of leaning toward increasing short-term bond issuance is substantially eroding the independence of the Federal Reserve, and the power to set monetary policy may de facto shift to the treasury. This week, U.S. Treasury Secretary Benson made clear his preference for relying more on short-term debt financing, a stance in contrast to his predecessor's previous criticism of excessive reliance on short-term Treasuries, which essentially amounts to a fiscal version of quantitative easing. In the short term, the Treasury's shift to more short-term Treasuries will spur risky asset prices further away from long-term fair value and structurally push inflation higher. The more far-reaching impact is that it will severely limit the ability of the US Federal Reserve to freely formulate anti-inflation monetary policy and create a fiscal dominance. The Fed's de facto independence has eroded in recent years, and a surge in short-term Treasuries issuance will further deprive the central bank of its free room to set monetary policy. Why short-term debt is a "fuel for inflation" In the coming years, rising inflation seems inevitable, and the US Treasury's decision to increase short-term debt issuance is likely to become a structural factor driving up inflation. Treasury bills, as debt instruments with a maturity of less than one year, are more "monetary" than long-term bonds. Historical data shows that the rise and fall of treasury bills as a share of total outstanding debt tends to precede the long-term ups and downs of inflation, which is more like a causal relationship than a simple correlation. The precursor to the current inflationary cycle was the rebound in Treasury bill issuance that began in the mid-2010s, when the US fiscal deficit grew procyclically for the first time. In addition, the explosive growth of the repo market in recent years has also amplified the impact of short-term debt. Thanks to improved clearing mechanisms and deeper liquidity, buyback transactions themselves have also become more like money. Treasury bills typically receive zero haircuts in repurchase transactions, resulting in higher leverage, and these treasury bonds enabled through buybacks are no longer assets that lie dormant on the balance sheet, but are converted into "quasi-currencies" that can drive up asset prices. In addition, the choice of issuance strategy has a very different impact on market liquidity. A stark example is when annual net bond issuance is too high as a ratio to the fiscal deficit, and the stock market tends to run into trouble. This was exemplified by the bear market in 2022, which prompted then-Treasury Secretary Janet Yellen to release a large amount of Treasury bills in 2023. This successfully led money market funds to use the US Federal Reserve's reverse repurchase agreement (RRP) tool to buy these short-term bonds, thereby injecting liquidity into the market and driving the stock market recovery. In addition, observations show that the issuance of short-term Treasury bills is generally positively correlated with the growth of the US Federal Reserve's reserves, especially after the pandemic; The issuance of long-term bonds, on the other hand, is negatively correlated with reserves. In short, issuing more long-term debt squeezes liquidity, while issuing more short-term debt increases liquidity. The issuance of short-term bonds provides a "sweet stimulus" to the market, but when the stock market is already at an all-time high, investors are crowded and valuations are extremely high, the effectiveness of this stimulus may not last. The era of "fiscal dominance" is coming, and the US Federal Reserve is in a dilemma For the US Federal Reserve, the irrational exuberance of asset prices and high consumption inflation, coupled with a large number of outstanding short-term debts, constitute a thorny policy dilemma. Traditionally, central banks should have tightened in response to this situation. However, in an economy that piles up a lot of short-term debt, rising interest rates will translate into fiscal austerity almost immediately, as the government's borrowing costs soar. At that point, both the US Federal Reserve and the Treasury Department will face significant pressure to ease policy to offset the impact. In any case, the ultimate winner will be inflation. As the outstanding balance of short-term Treasuries climbs, the Fed will be less and less able to meet its full mandate in raising interest rates. On the contrary, the government's large deficit and its issuance plan will substantially dominate monetary policy and create a fiscal dominance. The monetary policy independence to which markets are accustomed will be greatly reduced, and this is the case before the next Fed chairman, who is likely to favor the ultra-dovish stance of the White House. It is worth noting that the long-term impact of this shift on the market will be profound. First, the dollar will be a casualty. Second, as the weighted average maturity of government debt shortens, the yield curve will tend to steepen, meaning that long-term financing costs will become more expensive. To artificially depress long-term yields, the likelihood of policy tools such as quantitative easing, yield curve control (YCC), and financial repression being reactivated will increase significantly. In the end, this could be a "victory" for the Ministry of Finance. If inflation is high enough and the government manages to rein in its primary budget deficit, the debt-to-GDP ratio is likely to fall. But for the US Federal Reserve, this is undoubtedly a painful loss, and its hard-won independence will be severely weakened. Related reports The probability of interest rate cuts in July tends to zero! U.S. non-farm payrolls were super strong in June, U.S. stocks rose, bitcoin stood at $110,000 U.S. Treasury Secretary Bessen: The Fed will definitely cut interest rates in September! Trump tariffs have not made inflation worse Behind Trump's "obsession" of cutting interest rates: what is he worried about? Who will influence the world's most important interest rates? This article was first published in BlockTempo's "Dynamic Trend - The Most Influential Blockchain News Media".