Sure, maybe everyone else in the Trump administration arrived via clown car — loyalists, quacks and quislings, plucked from a Fox News green room or President Trump’s crack legal team. But at least two of Mr. Trump’s top economic appointees were supposed to be “serious people.” After all, competent financial stewardship is pretty important for the domestic economy, the global payments system and the dollar’s status as the world’s reserve currency. Mr. Trump realized the leaders of these federal institutions needed to be people the markets trust.
For a while, they were. Even amid trade wars, actual hot wars and threats to rule of law, markets seemed to be holding up. Thriving, even. Now Wall Street and the world’s investors appear to be finally losing faith in our economic leadership. What began as a few errant jitters seem to be approaching a full-blown credibility crisis for the Treasury, and if we’re extremely unlucky, perhaps the Fed as well.
Of all Mr. Trump’s appointees, Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh have among the most impressive C.V.s. Both worked on Wall Street, as protégés of the legendary investor Stan Druckenmiller. Both lectured at elite schools (Yale and Stanford, respectively). While temperamentally quite different — Mr. Bessent is a hothead who occasionally threatens fisticuffs; Mr. Warsh is almost preternaturally polished and cool — they both spent years earning Mr. Trump’s trust.
Wall Street and political elites also vouched for both Mr. Bessent and Mr. Warsh. They assured U.S. senators that these men were competent, small-c conservatives — that they’d protect the integrity of the institutions that financial markets rely on to function properly.
Within days of Mr. Bessent’s confirmation, at least, it was obvious this was a misjudgment. One of his earliest actions as secretary was giving DOGE access to the sensitive Treasury payments system, which disburses some $6 trillion in payments annually. This was supposedly to investigate “fraud,” but it also was an attempt to help the Trump administration unilaterally freeze payments required by Congress. (A federal judge restricted DOGE’s access before this happened.)
Soon after, Mr. Bessent also allowed the I.R.S. to share confidential tax data with immigration enforcement — undermining decades of work to convince immigrants that if they paid their taxes honestly, the payments wouldn’t be weaponized against them. (Federal judges have blocked that, too.)
Now, after criticizing his predecessor for allegedly trying to juice the economy ahead of an election, Mr. Bessent appears to have attempted exactly that. Last week, he announced that the U.S. Treasury would ramp up repurchases of its long-term government bonds, a move intended to reduce their interest rates (which could in turn reduce the cost of mortgages and other financial products). Midterms are looming, and looser money tends to make for happier voters.
Mr. Bessent’s plan backfired. Instead, after a brief dip, bond rates rose.
Why? Traders realized Mr. Bessent’s efforts were too puny to counteract the Titanic forces pushing rates up: elevated inflation; unsustainable government deficits; private firms issuing tons of debt to finance A.I. Then there is the greater risk associated with U.S. debt in general, because investors worry the United States is being run by what might politely be termed the B team — that is, people who may not take seriously their responsibility to safeguard the full faith and credit of the United States.
If anything, Mr. Bessent’s buyback play (announced along with comments insisting we can grow our way out of debt) only deepened those suspicions. It made Treasury leadership look feckless.
Don’t take my word for it. Mr. Bessent’s former mentor, Mr. Druckenmiller, said as much in an (apparently at least partly A.I.-generated) public rebuke in The Wall Street Journal. As The Financial Times put it in a pithy headline: Mr. Bessent got “Drucked.”
One thing that “Druck” hinted at was what the apparent politicization of debt management means for the Fed, an independent agency that is supposed to be guiding interest rates without political fear or favor.
Mr. Warsh, like Mr. Bessent, has had a wobbly start to his tenure. His most recent news conference was something of a disaster; Mr. Warsh either would not or could not articulate what the Fed’s plan was for tackling inflation, or why that plan did not appear to include interest rate increases. (Mr. Trump is demanding rates be lowered.) At one point Mr. Warsh seemed to suggest the Fed might switch its main yardstick for measuring inflation, raising concerns about backdoor attempts to soften the central bank’s commitment to reducing inflation.
To make matters worse, Mr. Trump himself weighed in. He insisted that Mr. Warsh really truly wanted to reduce interest rates, but couldn’t because “he’s got a board, and it’s a political board.” Days later Mr. Trump renewed his efforts to fire one of the members of that Fed board, which the Supreme Court had prevented him from doing.
Markets were not happy about any of this.
Long-term interest rates rose to their highest level since the 2007 financial crisis. Arguably, Mr. Warsh’s bungling of that news conference, plus fears about the competence and independence of his leadership, were among the reasons rates rose high enough to induce Mr. Bessent to attempt his bond market intervention.
Mr. Warsh has so far been quiet on the wisdom of Mr. Bessent’s buyback gambit, and whether it is encroaching on the Fed’s fief or compromising the hard-fought credibility of Treasury markets. For a clue of what he thinks, though, we might look to comments Mr. Warsh made last year, when he was still auditioning for the gig he has now.
At the time, Mr. Warsh said he wanted to revisit the 1951 Treasury-Fed Accord. This is the agreement that gave the Fed the specific form of political and structural independence that it enjoys today, and that has enabled it to tame inflation in decades past even if its rate increases upset the White House. Until then, the Fed had an informal agreement with Treasury to keep interest rates low, to make it cheaper for the president to finance expensive wars (like the one we are in now).
Mr. Warsh suggested the accord warranted reconsideration because he wished to formally cede some of the Fed’s authorities back to the Treasury — specifically, decisions about what to hold on the Fed’s balance sheet, and when and how to make sales or purchases. This would include, it appears, transactions of the kind Mr. Bessent is fooling with now.
That is why it might be understandable for markets to be a bit jittery about the credibility and competence of either institution at present.
Mr. Warsh will be in the hot seat Friday, as he delivers the chair’s annual remarks at Jackson Hole, Wyo. There he will have two jobs. The first is explaining how the Fed actually plans to fight inflation, and how it thinks about policy trade-offs and the like. The second is harder: proving he’s not getting rolled by this president or the other serious person this president appointed.
For both his sake and ours, let’s hope he succeeds.
