Krishna Guha, vice chair and head of central bank strategy at Evercore ISI, stated that the US Treasury Department's decision to increase its planned purchases of outstanding 10-year to 30-year debt will not impact the Federal Reserve's September interest rate decision. Guha acknowledged that the move "certainly complicates things" for Federal Reserve Chairman Kevin Warsh, who was sworn in on May 22, but stressed that the central bank's rate call remains dependent on incoming economic data.
The Treasury announced on August 19 that it would raise the maximum size of its nominal long-end buyback operations from $2 billion to at least $4 billion per operation. This doubling of buyback operations, effective from September 9 through November 4, targets 10- to 30-year nominal coupon securities, a segment where yields have been climbing to levels not seen since 2007. The aim is to address widening fiscal deficits and rising yields, which create a feedback loop of higher borrowing costs.
Guha's core argument is that the Treasury's liquidity tools and the Fed's interest rate framework operate on different tracks. While the expanded buyback program might offer a modest cushion for portfolio managers by stabilizing yields and reducing volatility in the 10- to 30-year sector, a $4 billion operation is considered a "rounding error" compared to the overall outstanding long-dated government debt. Therefore, it is unlikely to significantly influence the broader market dynamics that the Fed considers.
Fed Chair Warsh has emphasized a data-dependent approach to monetary policy. The September decision will primarily hinge on inflation readings, labor market data, and growth metrics. Guha suggests that the Treasury's buyback schedule will be a mere "footnote" in the Fed's briefing book, not a primary driver of their monetary policy decisions. The September meeting's outcome is largely anticipated to be determined by the macro data path, irrespective of the Treasury's market engineering.
