The Federal Reserve's announcement to purchase $40 billion in short-term Treasury bonds has been interpreted by market analysts as a precursor to a significant change brewing, with the Treasury's reach seemingly crossing a nearly century-old institutional red line.
TS Lombard's Chief U.S. Economist, Stephen Blitz, has put forth a startling viewpoint in a report: the balance sheets of the U.S. Treasury and the Federal Reserve are moving towards a substantive "merger."
The symbolic mark of this change is that Treasury Secretary Tom Bessenet may become the de facto "shadow Fed Chair," arranging for allies to enter the upper echelons of the Federal Reserve and establishing a direct reporting line to the White House.
1. Policy Shift
● On December 11, the Federal Reserve announced an operation to begin purchasing $40 billion in Treasury bills this month, with plans to gradually reduce the purchase scale sometime next year. On the surface, this is a technical operation aimed at managing the inflation of the Treasury's general account and controlling money market interest rates.
● Blitz's analysis points to a deeper intention: the Federal Reserve is essentially providing financing assurance for the Treasury's spending plans, ensuring that government financing is not hindered by interest rate fluctuations.
According to this logic, the traditional function of the bond market to issue "overload spending" warnings to the government through interest rate changes is becoming ineffective.
2. Structural Reshaping
● Behind this policy shift is a new power structure that is forming. Analysts indicate that once potential candidates like former Trump economic advisor Kevin Hassett enter the Federal Reserve, Bessenet will become their actual "boss." Blitz describes a "single presidential power theory" becoming a reality, with daily policy coordination conducted directly through Bessenet.
● U.S. media reported in July listing potential Federal Reserve Chair candidates from the Trump administration, with Hassett seen as the top choice, and Bessenet himself also mentioned. Bessenet had previously publicly suggested establishing a "shadow chair" to counterbalance the current Chair Powell.
● Within this structure, the core goal of the Treasury is clear and direct: to obtain cheap financing costs. The specific strategy is to inject liquidity into the short-term market while limiting long-term bond issuance to lower the government's borrowing costs.
3. Historical Red Line
● The independence of the Federal Reserve is not inherently strong but has been built through nearly a century of institutional construction and political maneuvering. In the 1970s, then-Fed Chair Arthur Burns significantly lowered interest rates under pressure from the Nixon administration, which is seen as one of the key reasons for the major inflation in the U.S.
● Today, signs of political intervention are more apparent. Trump has publicly called for the federal funds rate to be lowered to below 1%, claiming this would save the government trillions in debt costs.
● This tendency to instrumentalize central bank policy has raised concerns on Wall Street. JPMorgan CEO Jamie Dimon warned that intervening in the Fed's independence would have negative consequences.
4. Internal Disputes
● There are significant divisions within the Federal Reserve regarding this trend. Dallas Fed President Lorie Logan and Fed Governor Michelle Bowman strongly oppose the idea of merging balance sheets from a "philosophical perspective."
● They advocate for restoring volatility in the short-term market, allowing market signals to regain their function. Blitz believes this philosophical stance may ultimately yield to "political realities and practical operations."
● Notably, the Fed's official predictions for future interest rates have changed. Blitz points out that the number of FOMC members expecting the federal funds rate to be below 3.5% in 12 months has jumped from 11 to 16 compared to September.
● The economic forecast summary released by the Fed in December shows that the median core PCE inflation expectation for the end of 2026 is 2.5%, down from the September forecast of 2.6%, indicating a slow downward trend.
5. Inflation Alarm
● The most severe warning in Blitz's report points to future inflation. He predicts that the strategy aimed at providing cheap funding for the government will lead to higher inflation levels by 2026. Although the Fed has lowered its expectations for core inflation, with the combination of fiscal policy stimulus and monetary policy, "the inflation story will reassert itself in the next year or two."
● The report presents a two-stage scenario: the economy may weaken in the short term, leading the Fed to cut rates; but in the long term, "the overall trend is inflationary."
● Blitz concludes that unless economic performance is weaker than expected in early 2025, inflation will "re-emerge later in 2026 or 2027."
6. Market Pricing
● The gold market has already reacted to potential changes in monetary policy. The Fed lowered the policy interest rate to a range of 3.50%-3.75% in December, reducing the opportunity cost of holding gold. Additionally, the Fed's announcement to purchase about $40 billion in short-term Treasury bills to alleviate market liquidity pressure has also supported gold prices.
● Market analysts point out that in the context of a confirmed rate-cutting cycle and loose market liquidity, gold's mid-term "pricing anchor" is more inclined towards declining real interest rates and rising safe-haven demand. The ongoing purchases of gold by global central banks further reinforce the pattern of "high volatility and upward price centralization" in the gold market.
7. Future Game
● The leadership of the Federal Reserve is about to undergo changes. Current Chair Powell's term will end in May 2025, at which point a new management team will take over. Blitz believes that Powell's remarks about the new policy framework "are no longer substantive," as the power transition will bring a new policy direction.
● The Trump administration's economic team is seeking a "more compliant" Federal Reserve Chair to achieve the goal of significantly cutting rates to stimulate the economy before the midterm elections. If this trend of politically dominated monetary policy becomes a reality, it could repeat the "great inflation" of the 1970s.
Economic Indicators
Federal Reserve's December 2024 Forecast (Median)
Market Focus
2025 Core PCE Inflation
2.5%
Synergistic Effects of Fiscal and Monetary Policy
2026 Core PCE Inflation
2.5%
Lagging Effects of Cheap Financing Strategy
End of 2025 Federal Funds Rate
3.9%
Rate Cut Speed Under Political Pressure
Long-term Federal Funds Rate
3.0%
Final Neutral Level of Monetary Policy
Blitz describes the reliability of predictions based on conventional fiscal and monetary policy norms as "precarious."
Gold prices have already reached historical highs, with the market expressing uncertainty about future currency value through capital votes. When Fed Chair Powell's remarks are deemed "no longer substantive" by analysts, and when the Treasury Secretary may become the true "shadow chair," the fundamental rules of the financial market are quietly transforming under tectonic pressures.
The outcome of this transformation will determine the direction of global capital for the next decade.
Join our community to discuss and grow stronger together!
Official Telegram community: https://t.me/aicoincn
AiCoin Chinese Twitter: https://x.com/AiCoinzh
OKX Benefits Group: https://aicoin.com/link/chat?cid=l61eM4owQ
Binance Benefits Group: https://aicoin.com/link/chat?cid=ynr7d1P6Z
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
