Let’s get ready to rumble

Tale of the Tape

Source: Wikipedia, Turner Investments

  By Guest Blogger Doug Rowat

.

Donald Trump loyalists (be they supporters, appointees or staffers) turning against Trump is nothing new: former Chief of Staff John Kelly, National Security Advisor John Bolton, Secretary of Defense James Mattis, Secretary of State Rex Tillerson, Vice President Mike Pence, for example…I could go on but am mindful of word count. And, occasionally, Trump loyalists even turn on each other—just ask former Homeland Security Secretary Kristi Noem and the truckload of Republican senators who finished off her career.

However, never have we seen two Trump loyalists with vast influence over the US economy go head-to-head and work at direct cross-purposes. That’s unique.

Yet this is what we’re now witness to: a figurative boxing match between Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh who are both (quietly) duking it out for control of prevailing US interest rates.

Striding across the ring and throwing the first jabs was Bessent. In June, he applied pressure to Japan, strongly encouraging it to reduce spending to stabilize its currency and thus reduce the risk that it would sell US Treasuries (Japan owns over US$1.1 trillion in US Treasuries). A weak yen creates this risk because it encourages Japan to sell Treasuries to use the raised US dollars to buy back its own currency thus slowing the slide. Remember, with bonds, yields move inversely to price, so if you can discourage a major owner of Treasuries from selling, you limit downside pressure on prices and thus limit yields from rising. Round 1 to Bessent.

In August, Bessent transitioned from jabs to heavier body blows. This time the Treasury department wasn’t just discouraging others from selling US Treasuries it was, in fact, announcing plans to increase its own Treasury purchases. In an effort to resist rising yields, the US Treasury announced that it would double the size of its buybacks of long-dated Treasuries from US$2 billion to “at least” US$4 billion. The announcement temporarily sent bond yields lower, but they have since resumed their ascent. The Treasury’s buyback operation on September 10th resulted in total buybacks of US$5.2 billion. Round 2: a draw.

At the Jackson Hole Symposium at the end of August, Kevin Warsh replied with some jabs of his own. Warsh’s much anticipated speech addressed inflation head-on: “Inflation is running above our 2% target. So, the Fed’s predominant focus right now should be on prices.” Warsh went on to add that he wasn’t impressed by recent improvements in inflation data: “They do not tell me that the underlying trends have meaningfully improved.” Following Jackson Hole, the odds of a rate increase at the Fed’s September meeting immediately soared and bond yields also rose. Round 3 to Warsh.

On September 16th, Warsh and the Fed came out swinging, announcing the first rate increase in more than three years, bringing the Fed’s benchmark overnight rate to a range of 3.75% to 4.00%. At his press conference following the rate announcement, Warsh stated that “the plain fact is that inflation is too high, and has been for too long”, which most investors interpreted as the Fed being willing to do whatever it takes to curb inflation. Bond yields soared even more with the US 10-year Treasury yield breaching above 5% for the first time since October 2023. Round 4 to Warsh.

And this is where we stand at the moment. Figuratively speaking, we’re heading into round 5 of a 10-round heavyweight tilt. What might be in store in future rounds? Well, Bessent has now built up the Treasury General Account, which CNBC describes as the US Treasury’s “slush fund”, to roughly US$950 billion. That gives the Treasury enormous capacity to continue to buy bonds thus suppressing yields. However, at the same time, we’ve also recently been witness to how aggressively the Fed can attack inflation if it sets its mind to it. During the 2022 inflation crisis, the Fed raised rates 11 times, including an astonishing four consecutive rate increases of 75 bps. When all was said and done, the Fed added more than five percentage points to the overnight rate!

If both sides wanted to ‘go nuclear’ this gives some perspective regarding the massive haymakers that could be thrown in the upcoming rounds.

And, of course, overseeing this entire slugfest is Trump. So far, though he’s criticized the Fed intensely, he’s defended Warsh. But, if interest rates keep going up, how long will Trump remain in Warsh’s corner? Remember, Trump has said that he wants interest rates below 1%. And if Warsh is faced with pressure from both Bessent AND Trump? Well, that hardly seems like a fair fight.

But Warsh has been a consistent inflation hawk—his academic record supports this as does his record as an economist during his previous tenure at the Fed. And, so far at least, he’s not backing down.

This could be a fight that goes the distance.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd

Source: https://www.greaterfool.ca/2026/09/26/lets-get-ready-to-rumble/