By Martin Armstrong | Source

People constantly ask who has more power over interest rates, Treasury Secretary Scott Bessent or Federal Reserve Chairman Kevin Warsh. Warsh certainly has the more visible lever because the Federal Reserve controls the federal funds target and can influence short-term liquidity throughout the banking system. Bessent, however, sits at the Treasury where the government must actually finance the deficits Congress creates. Congress spends the money, the Treasury must borrow it, and the Fed attempts to influence the price of money, but NONE of them ultimately control global capital.

This is the great misconception surrounding the Federal Reserve. No Fed chairman controls the business cycle. Warsh can raise or lower the overnight rate, but he cannot simply decree that the 10-year Treasury should yield 3% if investors around the world demand 5%. The long end of the curve reflects inflation expectations, sovereign risk, competing investment opportunities, debt supply, and international capital flows. The Fed can intervene and buy bonds, but then it risks expanding liquidity and creating precisely the inflation it claims to be fighting.

Bessent faces the opposite side of the same problem. Treasury must continuously sell enormous quantities of debt because Washington has accumulated more than $40 trillion in obligations and continues running deficits. Bessent can alter maturities, conduct buybacks, and attempt to improve liquidity, but he cannot FORCE investors to finance Washington at the yield he prefers. If global capital demands greater compensation for holding U.S. government debt, then the Treasury eventually has to pay the market price.

We have been through this before. The Treasury once pressured the Fed to keep government borrowing costs artificially low, particularly during and after World War II. That arrangement eventually became unsustainable and culminated in the 1951 Treasury-Fed Accord, which restored greater monetary independence to the Federal Reserve. Government discovered then what it continually refuses to accept today: you cannot permanently dictate the price of money against the market.

So who is really more powerful, Bessent or Warsh? Warsh has greater direct power over short-term monetary policy, while Bessent controls how Treasury manages the financing of government debt. But both men eventually answer to the same force that no government has ever permanently defeated: global capital. Congress spends it. Bessent must borrow it. Warsh can influence its price. The MARKET ultimately decides what it is worth.