Analysis suggests that the rise in US Treasury yields, coupled with pressure on Trump's approval ratings, unexpectedly increased Federal Reserve Chair Waller's independent policy space. Powell's continued tenure on the board provides political cover, while rising yields also help suppress inflation. With deep ties to Treasury Secretary Basent and changing external circumstances, Waller is demonstrating unexpectedly strong strategic resolve and policy space.

Written by: Zhang Yaqi, Wall Street Insights

The tension between Federal Reserve Chair Waller and the White House is evolving in an unexpected manner. As Trump's approval ratings come under pressure and Treasury yields rise, Waller's policy chips have quietly increased, making the possibility of his resistance to rate-cutting pressure during Wednesday's meeting noteworthy.

Last week, as the 10-year US Treasury yield approached 5%, Treasury Secretary Basent launched a $6 billion Treasury buyback plan in an attempt to lower yields but failed. Meanwhile, Waller spoke at Jackson Hole, pledging to firmly combat inflation, gaining cautious recognition from some former critics and shifting market perceptions of his policy stance.

Prediction platform Polymarket shows that the market now expects the probability of a rate hike at this meeting to exceed 50%. Nevertheless, according to analysis by Gillian Tett of the Financial Times, the Federal Reserve may choose to take action only after the midterm elections. But a more significant signal is that the political calculations surrounding the Federal Reserve have changed, and Waller has displayed strategic capabilities and policy space earlier than the market expected.

Powell's continued board membership unexpectedly provides cover for Waller

In May of this year, Powell stepped down as Federal Reserve Chair but chose to remain on the Fed board in a rare move, informing friends that he would hold his position until Trump explicitly abandoned his threat to pursue litigation.

This arrangement led many observers to believe Waller would feel uncomfortable, but the opposite seems to be true. Tett's analysis suggests that Powell’s tenure had long made him a target for Trump's economic grievances, and his continued presence means that pro-Trump factions within the board remain a minority. This objectively gives Waller a political buffer—assigning any displeasing policies to collective decisions of the board. Waller himself has described the current operation of the Fed as a “family internal debate.”

Rising yields: a pressure for Waller, but also a tool

The rise in Treasury yields presents a tricky problem for Basent—he needs to issue over $10 trillion in US debt within the next year, creating significant pressure. Last week's $6 billion buyback effort ended in failure, further highlighting his difficult position.

However, Gavekal Research pointed out this week in a client report that “unlike Basent, Waller does not seem troubled by rising yields.” The reason is that higher yields themselves can help suppress inflation, tightening financial conditions without the need for rate hikes, which corroborates Waller’s earlier judgment at Jackson Hole that the “era of long stagnation has ended.”

At the same time, the Federal Reserve is currently reducing its long-term Treasury holdings by about $19 billion monthly, an amount exceeding Basent’s buyback plan. Gavekal specifically noted that Waller has commissioned an external committee to provide recommendations on balance sheet policy, with a report due this year, which provides him with another tool to tighten financial conditions.

The link with Druckenmiller: Waller and Basent will not directly break apart

The policy stance divergence between Waller and Basent has raised market concerns about a potential public “collision” between the two. Recently, Stanley Druckenmiller published a column in the Wall Street Journal urging Basent to “let the bond market speak” and to stop intervening, further strengthening this narrative.

However, a key link is often overlooked: both Waller and Basent come from Druckenmiller’s mentorship. They have supported each other in their bids for their current positions and share a common ideological foundation in crisis management. Analysts believe that regardless of how much divergence exists between the two in policy timing, they will work together to prevent systemic financial risks. With Basent facing repeated setbacks in managing the bond market, Waller’s relative strength is thus emphasized.

Trump's pressured approval ratings narrow the space for political intervention

Trump's political situation is also quietly changing. Polls indicate that voter dissatisfaction with Trump continues to rise, partly due to his Iran war policy. To boost Republican support ahead of the November midterm elections, Trump has proposed distributing $5,000 dividends to every adult citizen if the Republicans win, a move described by critics as a sign of “Trump at his peak,” although this judgment may still be premature.

At the same time, investor sensitivity to Trump’s policy statements has significantly decreased—after Basent announced the Treasury buyback, the yield rose instead of falling, which serves as evidence of this. This “desensitization” effect objectively grants Waller a larger independent expression space.

This spring, Democratic Senator Elizabeth Warren labeled Waller as Trump’s “yes man,” asserting that his credibility was entirely lost. However, given current trends, this “yes man” appears to be biting back. The real test ahead lies in whether Waller can maintain this hard-won independence when rising yields trigger pressures for quantitative easing.