At the long end, the bond market is nervous.
By Wolf Richter for WOLF STREET.
The 6-month Treasury yield, which is a good indication of rate hikes and rate cuts by the Fed within 2-3 months, is still glued to the underside of the Effective Federal Funds Rate (EFFR), which the Fed targets with its policy interest rates, and is thereby not yet predicting rate cuts within its vision of 2-3 months.
Last year, on June 26, the 6-month Treasury yield (then 5.33%, matching the EFFR) started skidding in anticipation of the 50-basis point rate cut that the Fed announced on September 18. By July 25, so exactly a year ago, it had dropped by 18 basis points to 5.15%. By August 28, it had dropped by 50 basis points to 4.83%, having fully priced in the 50-basis-point rate cut.
Today, July 25, the 6-month yield is still glued to the underside of the EFFR, and so it has still not begun to price in a rate cut at the September meeting, despite the public spectacle of Trump keelhauling Powell on a daily basis to get the Fed to cut its policy rates.
This 6-month Treasury yield is a summary depiction of the short end of the bond market where traders and algos look at millions of data points, and at everything the Fed says and does not say, to take bets on what will happen with interest rates over the next few months. And it still says, nothing will happen.
At the long end, the bond market is nervous.
The 30-year Treasury yield spent all week in the 4.90% to 4.96% range. On Friday, it ended at 4.92%, 59 basis points above the EFFR. Last week, it was at 5.0% for four days. So far in July, it has risen by 14 basis points.
Since the Fed cut by 100 basis points starting in September (dotted blue line), the 30-year yield (red line) has risen by 99 basis points! That was a massive move by the bond market against the Fed. And it has taught the Fed a lesson about spooking the bond market. It has since then switched to wait-and-see.
In this inflationary environment, the secret question is: How many rate cuts would it take to spook the bond market into pushing the 30-year yield to 6%?
The government has been trying actively to push down long-term yields, or at least keep them from rising further. It said that it would only slowly replenish its checking account, the Treasury General Account – which had been partially drained during the debt-ceiling period – by increasing the issuance of short-term Treasury bills, and taking it easy with the issuance of long-term notes and bonds.
Since mid-2024, the government has also been engaging in buybacks, where it issues new debt and uses the proceeds to buy back Treasury securities that had been issued some time ago. Some of the buybacks of long-dated securities – such as 30-year bonds issued in 2020 through mid-2021 with coupon interest below 2% – occur at massive discounts, whereby investors lock in their losses and the government reduces its outstanding debt. This is another effort, initially engineered by the Yellen-Treasury and continued by the Bessent-Treasury, to push down long-term yields.
The 10-year yield ended Friday at 4.39%, just above the EFFR. Despite some ups and downs, it hasn’t gone anywhere over the past five months.
The bond market is nervous about inflation. Inflation, enemy #1 of holders of long-term Treasury bonds, has been accelerating, driven by inflation in services. And the bond market is nervous about a lackadaisical Fed in light of this or potential future inflation.
And it’s nervous about the swelling Mississippi River of new Treasury debt flowing toward the bond market that it has to absorb, possibly with higher yields to draw in more buyers. Higher yields mean lower bond prices; that’s attractive for future bond buyers, and that’s what it takes to pull more buyers into the market to absorb the Mississippi River of new debt. And it means more bloodletting for existing bondholders.
But short-term yields up to six months haven’t budged much and remain glued to the EFFR of 4.33% as rate cuts are still on ice.
Expectations of rate cuts further down the road have pushed down yields over six months and into the five-year range.
The yield curve chart below shows the yield curve of Treasury yields across the maturity spectrum, from 1 month to 30 years, on three key dates:
- Red: Friday, July 25, 2025.
- Gold: January 10, 2025, just before the Fed officially pivoted to wait-and-see.
- Blue: September 16, 2024, just before the Fed’s rate cuts started.
The nervousness at the long end, rate cuts on ice at the short end, and rate-cut expectations for the next couple of years caused the yield curve to sag in the middle.
“Real” mortgage rates are back to pre-QE normal.
Mortgage rates of government-backed 30-year fixed mortgages run roughly in parallel with the 10-year Treasury yield, but are higher, and that spread varies.
In the latest reporting week, the average 30-year fixed mortgage rate ticked down to 6.74%. It has been in that range near 7% all year.
The super-low mortgage rates during the Fed’s mega-QE – when it bought trillions of dollars of MBS – were an anomaly of history that has caused the biggest explosion of home prices ever, along with raging inflation, into mid-2022. What’s left over now is a massive hangover, huge housing debt, and a frozen housing market.
“Real” mortgage rates – mortgage rates adjusted for inflation – have been back in the pre-QE normal range since the second half of 2023: The average 30-year fixed mortgage rate minus CPI inflation was 4.15% in June (average mortgage rate for June of 6.82% minus CPI for June of 2.67%).
The home-price explosion – home prices spiked by 50% and more in a couple of years – occurred from mid-2020 through mid-2022, driven by deeply negative “real” mortgage rates, when raging inflation far outran the Fed-repressed 3% mortgage rates. Borrowing at a 30-year-fixed rate of 3% while inflation was far higher was better than free money, and people went nuts because price suddenly didn’t matter anymore because money was better than free. This episode has caused this Fed to go down in WOLF STREET history as the “the most reckless Fed ever.”
Since then, the Fed has backed out of this recklessness, and “real” mortgage rates are back to normal, but home prices are way too high, and the housing market is suffering from a massive hangover.
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Just how high will long term US Treasury yields rise in the months ahead?
Likely to go to 6. The probability that debt is in service mode is high. Debt to gdp 125%. If rates are dropped, it won’t help mortgage rates, or the 30.
Great piece
I found a bond that I had never heard of before. It is a AA+ government backed mortgage financing bond. It is a 20 year bond paying 6.05%. The catch is that it is callable. It will certainly get called if we ever reach the point where the fed is satisfied with the level of inflation. Until then, I don’t mind getting over 6%.
So it’s essentially a Fannie Mae bond?
My memory was bad, it is only paying 6.02%
FEDERAL HOME LOAN BA SER BQ-2045 6.02000% Jul-07-2045
Most government “agency” bonds are callable, and they do get called.
Interesting, I’d prob just go 4.5 to 5% with a treasury.
Bonds are fun tho.
Careful. This is not a great bond. You essentially lose out if rates drop as your bond doesn’t go up in value since it’s called. If, however, interest rates go up, you do take the loss.
Look up what the duration and convexity of a bond are. This type of bond has an S-shaped convexity that limits your gains, but leaves you with losses if rates go up.
The duration on this bond is likely around 14 years, depending on the coupon size. A 0.5% rise in long-term interest rates will cause you to lose 7% of its value, or about 13 months of interest. Conversely, if rates drop, you get a call notice.
The Fed, which will only act aggressively in abnormal, drastic conditions in the North American home market, where the world economy takes its lead for future conditions, is an institution of unhelpfully conservative bent. Its policies affect other world banks, not only in the Americas, but also across the developed First World. In acting conservatively, the Fed is lowering the bar on a range of future actions, hindering the fight against inflation and ignoring creative solutions that may present themselves. The Fed needs less bureaucratic thinking and more out-of-the-box thinking.
The LAST thing anyone needs is for the Fed to think out of the box. QE was a result of out-of-the-box thinking, the aftermath of which has turned into a nightmare. The Fed needs to stick to rate hikes and rate cuts and providing liquidity to the banking system when needed via repos and the discount window, and leave everything else alone.
“We will be data dependent” J Powell
“We will see through the data when appropriate” J Powell
Doublespeak typical of an” operation” hiding in plain sight
How is it that the Constitution gives Congress the power to create money (mint), yet the Federal Reserve has that power? At least Congress answers to voters.
The constitution gives the federal government the right to make coin money and regulate its value. Banks in the US traditionally created paper money. Congress had the Federal Reserve Bank take over that role from individual banks in order to better regulate banks and control the money supply.
The Congress gave that power to the FED and can take it back. But if they took it back it would be the Congress that would be accountable, not the FED. The last thing any politician wants is to be held accountable.
This way, the congress can appropriate spending without having to take responsibility for creating the money that is spent.
If money creating were explicitly in the hands of Congress I wonder what the value of USD would be ?
J J Pettigrew
“How is it that the Constitution gives Congress the power to create money (mint), yet the Federal Reserve has that power?”
I see this a lot but it’s nonsense.
The Federal Reserve Board of Governors, the employer of Powell and of which Powell is chairman, is a government agency, and its seven Board Members, including Powell, are nominated by the President and confirmed by the Senate. Only the regional Federal Reserve Banks are private institutions.
Congress creates and passes legislation. It doesn’t execute the instructions in the legislation. It’s up to the government (the “executive branch”) to do that, including the Federal Reserve Board of Governors.
Money creation is a fundamental process in a modern capitalist economy. Many people contribute to it (borrowing to buy a home, for instance) while commercial banks effectively create large amounts of money. The constant denigration of the Federal Reserve is exhausting!
Hear, Hear !!
Wolf, well said. The Fed causes more problems than they solve.
I used to have a cat that would shit outside-of-the-box, it was the worse thing ever. The way I see it, there’s no difference, thinking inside the box is always better
I initially read “the most reckless Fed ever” as “the most feckless Fed ever”.
When Trump talks about lowering interest rates, he should tell us what kind of interest rates he is talking about. The Fed can only lower short term rates, which can drive long term rates higher, as we are seeing now. Long term rates are determined by the market. Right now, it is not possible to lower all interest rates (short and long) at the same time. If Trump really wants to lower long term rates, he should be jawboning Powell to raise the Fed Funds Rate.
Indeed.
Trump is wrong in this matter. He has an inherent hate of the Fed as it put him out of business in 1981. He hates interest rates as all do in the real estate business.
If he inserts a “dove” and we get rate cuts with the inflation rate STILL above the false target of 2% and stocks, Cryptos, Gold at all time highs, the long end will spank him.
Replacing JPow won’t mean rates drop. FOMC still has to vote unless Trump fires half the voting members and replaced them with loyalists. If that happens we have a cataclysmic economic future that will have severe global consequences. I really doubt this will happen.
I’m also wondering home much of the housing slump is from people waiting out the market. Literally everyday I hear from people saying the rates are gonna fall and they are going to buy. I never respond but always think, “Just how much time do you have?”
I have a 6-digit down payment sum working for me from the sale of my former house, $1,500-$2,000 less — at a minimum — in housing costs per month by renting the equivalent house (which is also being put to work), and can be liquid in an instant.
I can wait a very long time — forever even, given current math.
and tariffs WILL PROVE to raise prices, but will they call it “inflation”?
Un-tariffed services have been raising prices. Not tariffs. Maybe someday, tariffs will raise prices a little bit, while services prices (67% of what consumers spend) blow out? And you’ll still be looking at the tariffs with your magnifying glass while services inflation is blowing up your budget in front of your eyes?
https://wolfstreet.com/2025/07/15/feds-nightmare-cpi-inflation-in-services-reheats-not-tariffed-while-inflation-in-durable-goods-apparel-footwear-tariffed-remains-cool/
RBC bank quoted a day or so ago, thinks there has been so much front- running in some stuff the full effect of tariffs won’t hit until late fall. I was surprised to read that, but then considered a product like Sketchers shoes, a high value, low volume item.
Let’s say Walmart orders monthly. If it thought it might be looking at a 50% tariff in a month, it would make sense to triple the order. This might result in extra cost to expedite the order. but you can get a lot of shoes in a shipping container, and it’s feasible to warehouse on arrival.
This option doesn’t work for most commodities: high volume, low value.
“The Fed can only lower short-term rates, which can drive long-term rates higher, as we are seeing now. ”
If the Fed chose to replace maturing short-term debt with 30-year treasuries, wouldn’t it affect long-term rates?
The Fed CAN and DID control long rates, to a great extent, with the QE and the massive purchases of MBSs (2.5 Trillion?)
They drove long rates to 4000 yr lows!
The history of the Fed is to stay out of the long end, but they jumped in big, and now sit on a nearly $1 Trillion paper loss.
Right on. There are two government bond markets. The short end where the FED operates to keep rates low and finance government debt, and the long end where rates represent reality. Reality says, inflation and default are real possibilities in 10-30 years.
Inflation yes, default no. Default is technical impossible. Inflation is a reality. And it does the same thing softly.
I watched an interesting interview by the Carlyle economist yesterday .
He stated that due to the massive A.I. capital spending programs by the dominant Mag 7 companies, they are no longer huge free cash flow creating companies.
As partially a result of that phenomenon as well as our enormous budget deficits, the projected government deficits demand on the private sector savings is expected to be 40%, up from 20% roughly a decade before .
Back in the bad old Bond Bear market years of the late 70s, chatter about the %of private savings needed to fund the government was spoken of widely.
I think this new development of the Mag 7 losing their free cash flow is another reason for the Bond Bear market to continue.
I actually agreed with some of the things the current president has done.
Trying to force down short term rates is NOT one of them. In this case, the Fed is right.
Amen!
I agree also. Trump doing a lot of things right economically, but trying to cut interest rates is not one of them.
Regarding residential real estate (and I am a long time professional REALTOR), ‘timing the market’ is folly. One cannot buy time. Reasonable and smart people learn one thing about life– move on. Fine— sit in your home with your 3-4% mortgage and ‘wait it out’. I’ll see you in Heaven and your kids will sell the home in a nano-second.
Right on—because housing only goes one way. Up. Up. Up. If you try to buy real estate at even a slightly reduced price you’re sure to miss out on the best investment opportunity ever.
And, don’t even think about transaction costs. They get lost in the rounding. Real estate and mortgage brokers add value beyond their fees. You couldn’t do it without them.
This is funny. I hope you meant it to be funny.
Yes. I’ll let my death pledge run through its natural expiry in 2035 (I refi’d j to a 15 year, sub 3% in 2020). If I’m dead before then, the kids can do what they want. If I’m alive which I expect to be as I’ll be 60, well, I have a paid off house that’s quite pleasant to live in.
Fannie Mae stock was under a buck for many years and now it’s almost $9 a share.
What’s the reason for this, Wolf?
Speculation that they will be taken privately is the reason
From sheep, not wolf…
Fannie and Freddie are making money today and paying dividends to the Treasury. Big hedge funds believe Trump will privatize Fannie and Freddie which will unlock perhaps $150B in new shareholder value. If privatized, shares might go for upwards of $35. More so because the privatized company will still have tacit backing of the American taxpayer for bailouts of a private Fannie and Freddie like in 2008.
“More so because the privatized company will still have tacit backing of the American taxpayer for bailouts of a private Fannie and Freddie like in 2008.”
Wonderful – the US can continue to be a casino for the very wealthy
Privatization. They might do it. They’ve clamoring for it for years.
My guess is the new Fed chairman will be a “low interest rate” guy appointed by Trump with the objective of getting rates down.
We’ll see how the bond market reacts. My gut tells me to bet on more inflation and irreversible fiscal & monetary policies.
Will continue to hold precious metal investments.
The chairman cannot set policy rates. The FOMC votes, and flipping the chairman just changes the chairman. Powell’s term as Chairman ends in May 2026, but his term on the Board ends in January 2028. So if he stays till January 2028, he continues to vote till then, and a new chairman, such as Waller, might not even change the votes. But there could be messy dissents by the chairman.
Wolf — what would you expect to see happen to inflation if the Treasury shifts bond issuance from long duration eg 20+ years to T bills?
Presumably this would cause long duration bonds to spike, yields to tumble and further stimulate borrowing and spending. Bessent is already talking about doing this bc the gov realizes the inconvenient truth about leaving it to the market on long duration bonds.
That shift started under the Yellen Treasury.
One thing the Fed will likely do – it has been talking about for a long time — is shed a big portion of long-term Treasuries and all of its MBS, and replace them with T-bills. This will absorb $3-5 trillion in T-bills, and shift $3-5 trillion in long-term securities into the market. So right now, there aren’t even enough T-bills to do that. And I think a shift by the Treasury to T-bills will match the Fed’s shift to T-bills.
What this means is that the proportion of T-bills will increase, but the Treasury will still replace the long-term maturing Treasury debt with new long-term debt.
I don’t think there is any impact on inflation of that.
Wolf – I didn’t really understand your response, aside from the FED replacing long-term debt with long-term debt.
If the Treasury needs to issue say $5T in a given year, what’s to stop them from offering all or most of that in T-bill auctions as opposed to 20 or 30 year bonds? And IF that were to happen, wouldn’t that effectively mean less supply of 20/30 year bonds and ergo lower long-run rates and everything that comes with that?
Having re-read your response, your view is that the shift from the FED will match the shift in duration from the Treasury aside from the fact that someone will need to absorb the $3-5T in long duration bonds. But what happens after that? Wouldn’t there still be demand for treasuries at 20, 30 years and therefore push the price of those bonds way up? Or is your view that no rational investor will want to buy those 20/30 year bonds if the yield falls to say 3% because of a dearth of supply because of this shift in issuance mix?
No reason to sell with rates under 5 percent on 80 percent existing mortgages and those lien free…Trump’s big number is 88 and Too late is 88 in gemetria so it’s just a script, like most things in the USA it’s scripted by paid actors…I call it the military industrial political entertainment complex…
Most reckless Fed and Treasury….
“ According to the guidance released for the third quarter of Fiscal Year 2025 (April–June), Treasury anticipates borrowing $1,068 billion in the upcoming six months, which would be $72 billion more than it issued during the same period last year”
Many long moons ago, yardeni had a lengthy post, implying the 2yr treasury rate, was a good barometer of where the 10yr treasury rate would drift to, in the span of one year.
Even though so much seems broken in forward thinking, that’s within the realm of possibilities, like a10y around 3.95% — but, that measurement, like so many others, is being distorted by unprecedented treasury issuance, for unprecedented debt and servicing costs. I guess, if that plays out, mortgage rates decline, maybe — seems like recent relationships are not in sync.
Maybe there’s a continuation of Schrödinger Cat ambiguity, where speculators lust for cheaper yielding treasury debt, but, whatever that stupid demand is, there’s a huge supply of people that won’t support the stupidity. Betting on the equilibrium of volatile chaos seems like a sure way to burn cash.
I can’t shut up — think of this backdrop — we’re apparently supposed to run a hot economy, with tax cuts, biblical deficit with massive interest payments, wait for tariff outcomes, which in one way or another, will increase inflation, and then we execute an aggressive Fed rate cut program, to help stimulate demand, while the dollar falls and treasury yields decline.
Kinda seems like a Great way to bankrupt the casino.
This is exactly what I see happening to be honest.
In every possible scenario the answer seems to be inflation inflation inflation.
The Fed should do nothing for a few years. 5% long bonds are fine. 6.5% mortgages are fine. People need time to adapt to the situation and let prices clear. The constant picking and fidgiting leads everyone to say “just wait until..” and that leads to frustration and anger. Housing prices will find their equilibrium in a steady rate environment. Over time short rates might drop a bit on their own as people see a smooth yield curve and can plan for more than the next quarter or two.
How about no Fed chair after Powell for a while??
Like it. No one, but no one else has this Board, whose multiple members chime in with different views every week. You have to have a head of the Fed, which is the US central bank, but he doesn’t have to head a talking shop. One negative effect; media lay offs, as there wouldn’t be 12 (?) cups of tea leaves to read every week.
The Federal Reserve does a vast array of things other than to set a few very short term policy interest rates. Are you not aware of that?
Are TIPS a useful tool to look into the bond market?
It was just pointed out to me that the “real yield” on 30-year TIPS was in the 2.6% range. If I read the charts right, that’s something like a 20-year high.
TIPS have been a pretty good deal for new buyers recently, better than in decades. 10-year TIPS ran through the auction this week at a yield of 1.99% (interest to be paid), plus CPI-based inflation compensation. So if CPI is about 3% over the long term, the TIPS will yield 5%. In a year when CPI is 6%, the TIPS will yield 8%. In a year with CPI at 0%, they will yield close to 2%.
The interest yield used to be negative for many years. I’m not sure what this 2% interest yield indicates, maybe overconfidence in the market that inflation will go away, and so there is less demand for TIPS now than in the years before, and so they’re not bidding them up the prices (which pushes down the yield) like they used to? We couldn’t resist and nibbled on those TIPS at the auction (in tax-deferred accounts so we don’t have to mess with the tax situation that TIPS produce).
There seems to be close to a consensus that it would be a disaster if Trump gets his wish and forces the Fed Chair out. In any other context if the CEO’s wish is considered a disaster, he is not a desirable CEO.
Or is the rationale: ‘It’s just the economy’?
Nick – mebbe more akin to: “…forget it, Jake. It’s just…Chinatown…”.
may we all find a better day.
The power of the US dollar is in its reliability and predictability. People rushed away from emerging markets in 2008 and into dollars for this very reason. The stability of the currency is wholly reliant on the feds ability to use said rate cuts/increases as a tool to protect its stability. Politicizing rate cuts is his goal and it removes the most important tool they have. This is why forcing out the fed chair would be a disaster, it puts the future stability of USD into question.
I think Trump wants to drive us all out on the risk curve, into the casino. Deregulation of stock disclosures, crypto, gambling (“event contracts”), plus loosening rules on retirement account investments, are other signs of this. Lower rates would fit this like a glove.
Seems like for foreign buyers there is always some element of currency exchange risk present. What might be a good rate today might be different 10 years from now, but only matters I guess if they want to get money back in their currency eventually.
The Fisher Effect, “tendency for nominal interest rates to change to follow the inflation rate” is at play. The distributed lag effect of money flows, the proxy for inflation, peaks in September, but doesn’t materially fall until the 2nd qtr. of 2026.
In the last couple days T- Rump was on camera answering journalists’ questions and said exactly this: “We have no inflation. We wiped out inflation”
He truly is clueless! I guess that’s much easier to fool yourself into thinking when you’re a billionaire!
Inflation is a rich man’s grift!
Love my fixed rate debt at 3% indeed.
There are some lush yields out there. Private mortgages yielding 10%+, etc.
would rather own that than the stock market.
Home values have dropped by millions of dollars over the last three years in the Greater Toronto Area, a new analysis found.
Ten neighborhoods saw the median sale price of a single-family home fall by 40 percent or more since 2022, according to new research by Wahi, a Canadian real estate listing website and app.
Houses in Canada reached their peak values in April 2022, after two years of historically low supply and rock-bottom interest rates spurred by the COVID-19 pandemic.
‘Prices for single-family homes have held up better than condos, but Wahi’s latest analysis shows how much market trends can vary from neighborhood to neighborhood,’ Wahi CEO Benjy Katchen said in a statement.
Four neighborhoods in Brampton, the third largest Toronto suburb, were in the top ten in terms of largest percentage drops in value.
They included Huttonville (-53 percent), Vales of Humber (-50 percent), Northwood (-44 percent), and Westgate (-40 percent).
These areas are among the hardest hit, but the downward trajectory is widespread, with 289 of the 344 neighborhoods that Wahi analyzed having lower prices this year than in April 2022.
Windfields, an upper-middle class area northeast of downtown Toronto, had the biggest home price decline as a raw number.
The median sale price of a Windfields home declined by $3.1 million since 2022, when a property cost a whopping $6.3 million.
Windfields saw a $1 million bigger drop than Wanless Park, the next biggest loser at a $2.2 million decrease over the same period.
I did some back to school clothes shopping for my kid yesterday and prices have definitely risen. I’m talking places like Old Navy, Target, Macys, etc. I talked to other people who were also shopping and we all noticed the higher prices. Maybe hasn’t shown up in the government charts yet, but it will. We weren’t all having a collective delusion.
We just came back from eating out, and prices of all-American foods have definitely risen at that restaurant compared to three months ago when we were there last time, and by a lot. My electricity rate has jumped for the second time in less than 12 months. My broadband jumped by 60% last month. None of this is tariffed, it’s just plain old inflation in services where consumers do nearly 70% of their spending and it’s blowing away the inflation in a few imported goods that even have price increases. New vehicle prices are still going down, and some of them are tariffed. That’s also a biggie, far bigger than shoes and apparel. Spending on goods outside of food and gasoline is just a small part of consumers spending. Motor vehicles is the majority of that. So go take out your magnifying glass and look for tariffs on T-shirts while services inflation is blowing up your budget right in front of your eyes.
Wolf,
US Treasuries is issuing more and more T-Bills. This is helping them to keep long term rates in check. Even FED is talking about moving their balance sheet towards more Bills than Notes and Bond.
My question is: Can FED can control shorter end of the curve for UST? Similar like Operation Twist except for Short Term.
I understand FED sets overnight rates (one of those 5 rates they set). But when FED participates in T-Bill auction, do they expect UST to pay them at FED Funds Rate or Market rate? Are they competitive buyers or non-competitive buyer?
What if FED says we will lend to UST at 1% for all T-Bills, it will save lot of money for UST. I mean what will stop UST from making most of new issuance to T-Bills and FED will buy those Bills at very low rate. I am sure Warsh and Bessent will come up with creative thinking in order to screw us all. that’s what Warsh is indirectly proposing.
Till Powell is there, I have some hope of doing the right thing. I know some people may jump on this. Sure FED made mistakes. But QE didnt start after Powell took over. Even he tried to raise rates in 2019. It boom rang. But after inflation went crazy, this FED has deviated from their inflation goal. Most important he has clarified 2% goal remains same, Speed and urgency can be all debated. Very few even believed FED will do this much QT too. Still they did. In spite of all the political pressure, he has done right thing so far.
The Fed has for months been talking about getting rid of all its MBS, including by selling them, and reducing its holdings of longer-term Treasury bonds and notes; and after the balance sheet drops to the desired level, replacing the MBS and the notes and bonds with T-bills. That would take $3-5 trillion of T-bills, and the market will have to absorb $3-5 trillion in MBS and Treasury notes and bonds. But now there aren’t even enough T-bills out there to do that. So the Treasury department would have to issue $4 trillion in additional T-bills over the next few years so that the Fed could use those to replace $4 trillion in MBS and Treasury notes and bonds.
Two candidates for the the chairman job – Waller and Warsh — have already talked about it in those terms.