4 ms·

The bond market isn’t buying what Fed Chair Warsh is selling

139 points by kaycebasques 2mo ago

jmyeet 2mo ago
As everyone should know by now, the US government runs a massive deficit, that is the difference between tax receipts (and other income) minus expenses. The current US public debt is hovering around $40T and the annual deficit is pushing toards $2T. A lot of that $40T was borrowed at lower interest rates but let's assume for argument's sake that it was borrowed at 5%. That's $2T in interest alone every year. There's a huge difference between adding $2T in debt at 5%+ every year vs 1-3%. The Fed has auctions to sell its debt. That market clears at a certain interest rate so if the market isn't buying the debt the rate the Fed pays has to go up. That's what's happening here. What's driving this is that inflation is above the ~2% target. Well above, actually. There are generally two ways of tackling high inflation: with monetary policy (ie raising interest rates) and with fiscal policy (by raising taxes). Modern US administrations (both parties) have completely abandoned any pretense of ever raising taxes. That was the appropriate solution during the inflation shock of 2020-2022. Some European countries did this with a corporate windfall profits tax (eg Spain). The US did not. The problem is that since housing is such a huge part of consumer spending, higher interest rates mean higher mortgage rates, which means higher housing expenditure, which means higher inflation. Now luckily most mortgages in the US are 30 year fixed so this is slow to respond and only really affects new mortgage. Other countries aren't so lucky. But the big drivers in inflation are soaring grocery costs and energy costs. Energy costs, particularly diesel, is a massive driver of inflation. The rise in groceries since Covid has completley outpaced inflation while real wages have fallen. There's only so much more inflation the American consumer can take. Household savings rates are already very low so there's very little in the way of a buffer to absorb higher costs. This is all being exacerbated by the disastrous war in Iran and the war in Ukraine. Russia had been a net exporter of diesel until recently as Ukraine has damaged an estimated 40% of Russian refining capcity. Refineries in the Gulf have also been taken offline. There's been a loss of over 1 million barrels per day in refining capacity. This is somewhat paradoxically why crudel oil prices are relatively low given all that's going on: because crudel oil is mostly useless unless it's refined. Destroy refineries and demand for oil goes down. But the demand for refined petroleum products goes up, way up [1]. It should be noted that China has essentially saved the world economy up to this point [2]. The closure of the Strait of Hormuz blocked the passage of ~20 million barrels per day of crude (plus 20-30% of the world's natural gas plus fertilizer plus helium). The inflation shock of 2020-2022 occurred because we lost "only" 10 million barrels. But China seemingly cut their imports by 5M. Saudi Arabia diverted 5-7 via the East-West pipeline to the Red Sea. The US has been draining the strategic reserve and so net we've only lost a few million barrels per day. That's temporary. the SPR has hit historic lows not seen in 40 years and it can't get much lower without risking a collapse of the salt caverns it's stroed in in Louisiana. Nobody knows if and when that'll happen because we've never done this before. The backdrop for all this is that there has been a decades-long effort at this point to essentially loot government coffers in the US. More tax cuts for the top 0.01%. The Western world in general has reached a breaking point where land hoarding and wealth need to be taxed or society as we know it will actually break down. I'm not being hyperbolic. Currently, there's no concern for that from the looters because upheaval means war, which means more weapons sales. Also, free movement of capital means the wealthy believe they can just flee. For context, a mere 10 years ago the US total public debt was ~$16T. It's 2.5x'ed in a decade and only going to get worse unless something drastically changes. Warsh was put in to cut rates for political purposes. The best he can do is to hold rates steady because they really should go up in an environment where we aren't going to raise taxes. As for Iran, it's been clear since at least April, that this is an unmistakable and undeniable total strategic defeat for the US and there is no way out other than to surrender. This event will be written about in history books as a turning point in the world order that was designed by the US, for the US after 1945. We are entering a new era. This is going to redefine US relationships all over the world. [1]: https://rbnenergy.com/market-data/3-2-1-crack-spread https://rbnenergy.com/market-data/3-2-1-crack-spread [2]: https://www.theatlantic.com/economy/2026/07/china-iran-usa-oil-prices/688086/ https://www.theatlantic.com/economy/2026/07/china-iran-usa-o...
- bayarearefugee 2mo ago
  And somehow this situation is all Joe Biden's fault, and Trump is still going to fix it, any day now. A very significant amount of American voters believe this. To this day. And their belief in this is still being reinforced by the vast majority of the "mainstream media" which they believe is left-biased, which hasn't been true for very many years at this point. This is why we are fucked and there is no way out of this that doesn't involve existential threat to our current society.
  - thrwaway55 2mo ago
    [flagged]
    - kkotak 2mo ago
      You're in luck then. Enjoy the ride.
    - Der_Einzige 2mo ago
      If no one had tried to shoot Trump and he stayed as as he was in his first term, he'd be the "sleepy" one. This is an actual quote from Trump circa 2016. His rage at his trial and attempt assassinations gave him 10 extra years of relative energy: "Look, having nuclear — my uncle was a great professor and scientist and engineer, Dr. John Trump at MIT; good genes, very good genes, OK, very smart, the Wharton School of Finance, very good, very smart — you know, if you're a conservative Republican, if I were a liberal, if, like, OK, if I ran as a liberal Democrat, they would say I'm one of the smartest people anywhere in the world — it's true! — but when you're a conservative Republican they try — oh, do they do a number — that's why I always start off: Went to Wharton, was a good student, went there, went there, did this, built a fortune — you know I have to give my like credentials all the time, because we're a little disadvantaged — but you look at the nuclear deal, the thing that really bothers me — it would have been so easy, and it's not as important as these lives are — nuclear is so powerful; my uncle explained that to me many, many years ago, the power and that was 35 years ago; he would explain the power of what's going to happen and he was right, who would have thought? — but when you look at what's going on with the four prisoners — now it used to be three, now it's four — but when it was three and even now, I would have said it's all in the messenger; fellas, and it is fellas because, you know, they don't, they haven't figured that the women are smarter right now than the men, so, you know, it's gonna take them about another 150 years — but the Persians are great negotiators, the Iranians are great negotiators, so, and they, they just killed, they just killed us, this is horrible."
miohtama 2mo ago
Reuters attributes this to be somehow a personal flaw in Walsh. Pretty sure Jerome Powell, the previous chair, would have done exactly the same thing. In fact Jerome Powell is still in the Fed and participated in this decision.
- jquery 2mo ago
  Jerome Powell would’ve communicated in a mealy mouthed and confusing way that was meant to appease Trump? I’ve had quite enough of Trump’s “meritocracy”, personally.
  - ndsipa_pomu 2mo ago
    I think the word you were looking for is "kakistocracy" - government by the worst, least qualified, or most unscrupulous people.
- 0x53 2mo ago
  I think the article makes a good case why the difference in chair matters - ending forward guidance - confusing wording around what the target is now (pce vs “other stuff”) - The fact that he was appointed specifically to not raise rates None of the applies to Mr. Powell whom the market seems to have put a great deal of trust in
- matwood 2mo ago
  Maybe I missed it, but did Walsh explicitly say it's tariffs and the war driving inflation? There's a reason Trump was fighting with Powell. https://www.reuters.com/markets/us/powell-says-tariffs-keeping-inflation-elevated-fed-watching-energy-prices-2026-03-18/ https://www.reuters.com/markets/us/powell-says-tariffs-keepi...
seanhunter 2mo ago
Speaking as a non-American, and without the lens of partisan politics, it seems incredibly obvious to me that Kevin Warsh < Jerome Powell < Janet Yellen ... in terms of credibility as an economist, with Ben Bernanke one step to either side of Powell depending on how much you feel he was a victim of circumstances in the 2008 crisis. That said, the current problems in the US economy are entirely out of the control of the Fed and all to do with the current administration's policies (mainly the war vs Iran driving commod vol and the on-again off-again trade tariff shuffle driving fx vol) and the long-term deficit position driving rate curve shenanigans. The AI and private credit bubbles are just adding to the anxiety. All of this ultimately feeds into domestic inflation and job market malaise. The bond market generally doesn't take shit from anyone and it's not surprising to me that bond investors are not impressed. None of that is on Warsh.
- cyberax 2mo ago
  Look at outcomes, not just words. Bernanke made a correct prediction that the rate had to stay low and that it wouldn't result in high inflation. Meanwhile, the ECB started raising the rate once the economy stopped crashing. And that promptly caused the second recession in Europe.
  - orwin 2mo ago
    What caused the second recession in Europe was a decrease in energy supply. Country that depended the most on the North sea or North Africa oil and gas exports suffered the most. We still live under the constraints of our world, and energy availablity is a big one.
    - cyberax 2mo ago
      I'm talking about the rate hikes in 2010-2011 after the economy started picking up. It caused the double-dip recession in 2012: https://www.macrotrends.net/global-metrics/countries/euu/european-union/gdp-gross-domestic-product https://www.macrotrends.net/global-metrics/countries/euu/eur... and https://www.statista.com/statistics/621489/fluctuation-of-fixed-rate-interest-rates-ecb/ https://www.statista.com/statistics/621489/fluctuation-of-fi... The actions of the ECB caused at least 10 years of misery for Europe. The 2008 crisis was inevitable, but the US bounced back from it within 2 years. While Europe is _still_ not fully recovered. Bernanke deserves a lot of credit for that. He was brave enough to ignore the deficit hawks who were screaming about "inflation" and "debasing the dollar".
Barbing 2mo ago
Not Hacker-y enough I think; dropped to third page from first. Now rank 79, +108 points, 42 comments, +3hr Thanks for the link, hope they figure it out.
tmaly 2mo ago
The direction of the 10Y is what people should care about as this a proxy for mortgage rates. The current direction is not going where consumers would want.

139 points by kaycebasques 2mo ago

As everyone should know by now, the US government runs a massive deficit, that is the difference between tax receipts (and other income) minus expenses. The current US public debt is hovering around $40T and the annual deficit is pushing toards $2T. A lot of that $40T was borrowed at lower interest rates but let's assume for argument's sake that it was borrowed at 5%. That's $2T in interest alone every year. There's a huge difference between adding $2T in debt at 5%+ every year vs 1-3%. The Fed has auctions to sell its debt. That market clears at a certain interest rate so if the market isn't buying the debt the rate the Fed pays has to go up. That's what's happening here. What's driving this is that inflation is above the ~2% target. Well above, actually. There are generally two ways of tackling high inflation: with monetary policy (ie raising interest rates) and with fiscal policy (by raising taxes). Modern US administrations (both parties) have completely abandoned any pretense of ever raising taxes. That was the appropriate solution during the inflation shock of 2020-2022. Some European countries did this with a corporate windfall profits tax (eg Spain). The US did not. The problem is that since housing is such a huge part of consumer spending, higher interest rates mean higher mortgage rates, which means higher housing expenditure, which means higher inflation. Now luckily most mortgages in the US are 30 year fixed so this is slow to respond and only really affects new mortgage. Other countries aren't so lucky. But the big drivers in inflation are soaring grocery costs and energy costs. Energy costs, particularly diesel, is a massive driver of inflation. The rise in groceries since Covid has completley outpaced inflation while real wages have fallen. There's only so much more inflation the American consumer can take. Household savings rates are already very low so there's very little in the way of a buffer to absorb higher costs. This is all being exacerbated by the disastrous war in Iran and the war in Ukraine. Russia had been a net exporter of diesel until recently as Ukraine has damaged an estimated 40% of Russian refining capcity. Refineries in the Gulf have also been taken offline. There's been a loss of over 1 million barrels per day in refining capacity. This is somewhat paradoxically why crudel oil prices are relatively low given all that's going on: because crudel oil is mostly useless unless it's refined. Destroy refineries and demand for oil goes down. But the demand for refined petroleum products goes up, way up [1]. It should be noted that China has essentially saved the world economy up to this point [2]. The closure of the Strait of Hormuz blocked the passage of ~20 million barrels per day of crude (plus 20-30% of the world's natural gas plus fertilizer plus helium). The inflation shock of 2020-2022 occurred because we lost "only" 10 million barrels. But China seemingly cut their imports by 5M. Saudi Arabia diverted 5-7 via the East-West pipeline to the Red Sea. The US has been draining the strategic reserve and so net we've only lost a few million barrels per day. That's temporary. the SPR has hit historic lows not seen in 40 years and it can't get much lower without risking a collapse of the salt caverns it's stroed in in Louisiana. Nobody knows if and when that'll happen because we've never done this before. The backdrop for all this is that there has been a decades-long effort at this point to essentially loot government coffers in the US. More tax cuts for the top 0.01%. The Western world in general has reached a breaking point where land hoarding and wealth need to be taxed or society as we know it will actually break down. I'm not being hyperbolic. Currently, there's no concern for that from the looters because upheaval means war, which means more weapons sales. Also, free movement of capital means the wealthy believe they can just flee. For context, a mere 10 years ago the US total public debt was ~$16T. It's 2.5x'ed in a decade and only going to get worse unless something drastically changes. Warsh was put in to cut rates for political purposes. The best he can do is to hold rates steady because they really should go up in an environment where we aren't going to raise taxes. As for Iran, it's been clear since at least April, that this is an unmistakable and undeniable total strategic defeat for the US and there is no way out other than to surrender. This event will be written about in history books as a turning point in the world order that was designed by the US, for the US after 1945. We are entering a new era. This is going to redefine US relationships all over the world. [1]: https://rbnenergy.com/market-data/3-2-1-crack-spread https://rbnenergy.com/market-data/3-2-1-crack-spread [2]: https://www.theatlantic.com/economy/2026/07/china-iran-usa-oil-prices/688086/ https://www.theatlantic.com/economy/2026/07/china-iran-usa-o...

bayarearefugee 2mo ago
And somehow this situation is all Joe Biden's fault, and Trump is still going to fix it, any day now. A very significant amount of American voters believe this. To this day. And their belief in this is still being reinforced by the vast majority of the "mainstream media" which they believe is left-biased, which hasn't been true for very many years at this point. This is why we are fucked and there is no way out of this that doesn't involve existential threat to our current society.
- thrwaway55 2mo ago
  [flagged]
  - kkotak 2mo ago
    You're in luck then. Enjoy the ride.
  - Der_Einzige 2mo ago
    If no one had tried to shoot Trump and he stayed as as he was in his first term, he'd be the "sleepy" one. This is an actual quote from Trump circa 2016. His rage at his trial and attempt assassinations gave him 10 extra years of relative energy: "Look, having nuclear — my uncle was a great professor and scientist and engineer, Dr. John Trump at MIT; good genes, very good genes, OK, very smart, the Wharton School of Finance, very good, very smart — you know, if you're a conservative Republican, if I were a liberal, if, like, OK, if I ran as a liberal Democrat, they would say I'm one of the smartest people anywhere in the world — it's true! — but when you're a conservative Republican they try — oh, do they do a number — that's why I always start off: Went to Wharton, was a good student, went there, went there, did this, built a fortune — you know I have to give my like credentials all the time, because we're a little disadvantaged — but you look at the nuclear deal, the thing that really bothers me — it would have been so easy, and it's not as important as these lives are — nuclear is so powerful; my uncle explained that to me many, many years ago, the power and that was 35 years ago; he would explain the power of what's going to happen and he was right, who would have thought? — but when you look at what's going on with the four prisoners — now it used to be three, now it's four — but when it was three and even now, I would have said it's all in the messenger; fellas, and it is fellas because, you know, they don't, they haven't figured that the women are smarter right now than the men, so, you know, it's gonna take them about another 150 years — but the Persians are great negotiators, the Iranians are great negotiators, so, and they, they just killed, they just killed us, this is horrible."

miohtama 2mo ago

Reuters attributes this to be somehow a personal flaw in Walsh. Pretty sure Jerome Powell, the previous chair, would have done exactly the same thing. In fact Jerome Powell is still in the Fed and participated in this decision.

jquery 2mo ago
Jerome Powell would’ve communicated in a mealy mouthed and confusing way that was meant to appease Trump? I’ve had quite enough of Trump’s “meritocracy”, personally.
- ndsipa_pomu 2mo ago
  I think the word you were looking for is "kakistocracy" - government by the worst, least qualified, or most unscrupulous people.
0x53 2mo ago
I think the article makes a good case why the difference in chair matters - ending forward guidance - confusing wording around what the target is now (pce vs “other stuff”) - The fact that he was appointed specifically to not raise rates None of the applies to Mr. Powell whom the market seems to have put a great deal of trust in
matwood 2mo ago
Maybe I missed it, but did Walsh explicitly say it's tariffs and the war driving inflation? There's a reason Trump was fighting with Powell. https://www.reuters.com/markets/us/powell-says-tariffs-keeping-inflation-elevated-fed-watching-energy-prices-2026-03-18/ https://www.reuters.com/markets/us/powell-says-tariffs-keepi...

seanhunter 2mo ago

Speaking as a non-American, and without the lens of partisan politics, it seems incredibly obvious to me that Kevin Warsh < Jerome Powell < Janet Yellen ... in terms of credibility as an economist, with Ben Bernanke one step to either side of Powell depending on how much you feel he was a victim of circumstances in the 2008 crisis. That said, the current problems in the US economy are entirely out of the control of the Fed and all to do with the current administration's policies (mainly the war vs Iran driving commod vol and the on-again off-again trade tariff shuffle driving fx vol) and the long-term deficit position driving rate curve shenanigans. The AI and private credit bubbles are just adding to the anxiety. All of this ultimately feeds into domestic inflation and job market malaise. The bond market generally doesn't take shit from anyone and it's not surprising to me that bond investors are not impressed. None of that is on Warsh.

cyberax 2mo ago
Look at outcomes, not just words. Bernanke made a correct prediction that the rate had to stay low and that it wouldn't result in high inflation. Meanwhile, the ECB started raising the rate once the economy stopped crashing. And that promptly caused the second recession in Europe.
- orwin 2mo ago
  What caused the second recession in Europe was a decrease in energy supply. Country that depended the most on the North sea or North Africa oil and gas exports suffered the most. We still live under the constraints of our world, and energy availablity is a big one.
  - cyberax 2mo ago
    I'm talking about the rate hikes in 2010-2011 after the economy started picking up. It caused the double-dip recession in 2012: https://www.macrotrends.net/global-metrics/countries/euu/european-union/gdp-gross-domestic-product https://www.macrotrends.net/global-metrics/countries/euu/eur... and https://www.statista.com/statistics/621489/fluctuation-of-fixed-rate-interest-rates-ecb/ https://www.statista.com/statistics/621489/fluctuation-of-fi... The actions of the ECB caused at least 10 years of misery for Europe. The 2008 crisis was inevitable, but the US bounced back from it within 2 years. While Europe is _still_ not fully recovered. Bernanke deserves a lot of credit for that. He was brave enough to ignore the deficit hawks who were screaming about "inflation" and "debasing the dollar".

Barbing 2mo ago

Not Hacker-y enough I think; dropped to third page from first. Now rank 79, +108 points, 42 comments, +3hr Thanks for the link, hope they figure it out.

tmaly 2mo ago

The direction of the 10Y is what people should care about as this a proxy for mortgage rates. The current direction is not going where consumers would want.