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Will Trump Preside over the Wedding between the Fed & Treasury? And what would it mean for Markets?
NowPress play to follow along0:00 / 37:03
Chapters18 segments · tap to seek
ticker lesson
Breakdown
0:00lesson
Fed rate hike and market reaction
- Fed raised rates first time in 3 years
- Market priced in rate hike over last few months
- Rate hike unexpected 6 months ago
- Never assume outcomes are certain
- Conviction vs. certainty
1:52lesson
Fed-Treasury relationship
- Fed and Treasury may eventually merge
- Marriage analogy with potential for conflict
- Globalization is no longer a reality
- World no longer cooperating
- Fed hike led to 10-year yield at highest in a year
3:45lesson
Rate hikes and global implications
- Rate hike not a big deal on absolute basis
- Worsh's credibility established by raising rates
- Rate hike not necessarily bad for US
- Global rates are rising
- China is an outlier with low rates
5:54lesson
Treasury and global demand for US debt
- Rest of the world continues to buy treasuries
- Foreign holdings of treasuries at all-time high
- Bond vigilantes not showing up in spades
- Treasuries not defended as investment
- Milkshake theory predicated on rising rates
7:58lesson
US dollar and global reserve currency
- US has advantage as global reserve currency
- Dollar may weaken but not to extreme levels
- US negotiating with global partners
- Pressure on global economy as rates rise
- US not in uniquely bad position
9:51lesson
Fed and Treasury roles in the system
- Fed and Treasury both involved in dollar management
- Treasury borrows and spends, Fed sets monetary policy
- Treasury sets dollar policy, Fed sets monetary policy
- Fed is lender of last resort
- Control of money is key to power
11:45lesson
Treasury and debt management
- Treasury manages debt issuance and maturity
- Treasury oversees sanctions and exchange rate policy
- Primary dealers mandated to bid on auctions
- Failed auctions not possible due to legislation
- Debt management is core to US economy
13:57lesson
Fed's role in monetary policy
- Fed sets rates and manages reserves
- Fed is lender of last resort
- Fed's dual mandate includes stable prices
- Fed not independent, subservient to Congress
- Fed's autonomy is limited
16:06lesson
Fed and Treasury independence
- Fed is not independent, has autonomy
- Fed must testify to Congress twice a year
- Fed's independence is operational, not constitutional
- Congress can revoke Fed's independence
- Fed and Treasury both involved in dollar system
18:18lesson
Treasury and Fed debt operations
- Fed buys treasuries during QE and stress
- Fed holds treasuries on balance sheet
- Treasury still owes money to Fed
- Circular debt financing
- Consolidation of balance sheets could reduce debt
20:27lesson
Fed's influence on economy
- Fed influences borrowing costs and lending
- Fed manages bank reserves and credit
- Fed tries to maintain asset prices
- Fed's impact on economy is lagged
- Fed is reactionary agency
22:35lesson
Fed-Treasury Accord and historical context
- Fed-Treasury Accord established post-WWII
- Fed maintains autonomy over Treasury
- Battle over interest rate caps in 1950s
- Fed's independence is not absolute
- Treasury can exert influence over Fed
24:46lesson
Fed and Treasury overlap in dollar system
- Fed is Treasury's bank
- Treasury General Account at Fed
- Bank reserves held at Fed
- Two sides of the same ledger
- Overlap in dollar management
26:43lesson
Global implications of dollar control
- US has limited control over Euro dollar market
- Treasury can deny dollar access via OFAC
- Fed can supply dollars in crisis
- Two levers for dollar control
- US can limit dollar availability
28:50lesson
Treasury and Fed collaboration
- Treasury increasingly involved in Fed operations
- Swap lines issued to Argentina and Iran
- Treasury buyback program instead of Fed
- Same dollar, different operations
- Friction in institutional roles
31:01lesson
Friction between Fed and Treasury
- Fed raises rates, increases US funding costs
- Fed wants stable prices, Treasury prefers lower rates
- Conflict over price of money
- Treasury issues at short end, Fed at long end
- Two institutions acting on same curve
33:27lesson
Fed independence and political dynamics
- Fed's independence is operational, not constitutional
- Congress can revoke Fed's independence
- Fed is not a political institution
- Treasury is political by design
- Friction from overlapping roles
35:28lesson
Future of Fed-Treasury relationship
- Potential for increased collaboration
- Friction from overlapping roles
- Fed's independence is under scrutiny
- Report on Fed-Treasury dynamics coming in October
- Understanding roles is key to understanding future changes
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