Treasury Intervention Cannot Override Fiscal Pressure on Long-Term Yields

The U.S. Treasury’s support for the Japanese yen and its signals about buying outstanding long-term Treasury securities share a single motivation, according to Anil Kashyap: concern about the United States’ own borrowing costs.

Neither measure can durably change the relevant prices without changes to the underlying policies, Kashyap argues. Japan’s yen will continue to depreciate if Japanese authorities do not raise interest rates or otherwise tighten monetary policy. U.S. long-term borrowing costs will remain under pressure unless fiscal policy becomes more balanced and sustainable. A market intervention may move prices on the day; it does not by itself alter those fundamentals.

In the currency case, the Treasury spent dollars to buy yen, Kashyap explains, partly to prevent Japan from needing to use dollars that could otherwise have been financed through Treasury sales. Japan could have raised funds through repurchase transactions rather than selling Treasuries, he notes, but the United States intervened directly. Kashyap describes the move as unusual support by one country for another’s currency, and says he believes the United States had not done this since the Plaza Accord in 1986.

The bond-market measure followed the same logic. Treasury debt management normally depends on regular, predictable auctions: investors are told how much debt will be issued and at what maturities, allowing them to plan around a known supply path. Kashyap describes that predictability as the Treasury’s long-standing operating principle.

Buying back outstanding securities changes the supply after investors have organized their portfolios around those expectations. As Steven Davis presses him to clarify, the unusual feature is not simply that Treasury can repurchase debt. It is the departure from the normal, preannounced schedule.

Kashyap also points to Treasury cash held at the Federal Reserve, an account generally discussed most visibly around debt-ceiling episodes because it can temporarily sustain government payments without new issuance. Bessent had raised the possibility of using those funds as well. The Treasury has not specified how much it would deploy, but Kashyap says the balance could make a material difference if used.

That unspecified capacity has itself become part of the market signal. Investors do not know when or at what scale Treasury might step in; some have called the resulting uncertainty a “shadow treasury rate.” Officials presented prospective purchases as a way to preserve market functioning and liquidity. Kashyap says market participants tend to read the action as an effort to restrain yields.

The yen had already returned to where it stood when the United States intervened, Kashyap says. His conclusion is that tough talk and isolated action do not hold when they are not backed by policies that change the underlying fiscal or monetary outlook. Japan could pair intervention with tighter monetary policy. The United States could make new spending fiscally sustainable through offsetting reductions elsewhere or other measures that improve the budget outlook. Without such changes, the market pressures remain.

The 30-year Treasury rate was at a 19-year high at the time of the discussion, Anil Kashyap says, while conversations around Jackson Hole had turned to how high the 10-year rate might go. The immediate concern is not only the market level of yields, but what a sustained increase means for governments carrying large debt loads.

Steven Davis frames the basic arithmetic: when debt is high relative to GDP, a one-percentage-point increase in borrowing costs quickly becomes a substantial addition to debt-service costs.

Japan’s roughly 160% figure adjusts for debt that is, in effect, issued by one part of government and held by another, including through the postal savings bank. On that measure, Davis observes, a one-point increase in yields would add about 1.6% of GDP to servicing costs. Kashyap agrees: it is a large number.

The United States faces a similar, if somewhat smaller, sensitivity. Kashyap describes an economy at full employment that is nevertheless running large deficits. The recently enacted “one big beautiful bill,” he argues, did not pay for itself; it added debt and implies more issuance. That fiscal outlook, rather than a temporary impairment in Treasury-market plumbing, is what he sees as putting upward pressure on rates.

Japan’s position illustrates both the difficulty and the available policy options. Kashyap says its government is reluctant to raise rates despite concern about the yen because the country has even more debt outstanding. At the same time, its new prime minister entered office with substantial spending commitments: a temporary cut in the consumption tax on food and necessities, plus a program to rearm the country. The former will widen the deficit, he says, and the latter requires further spending. If those commitments are not financed and interest rates do not adjust, the yen will continue to weaken.

Japan does have a fiscal instrument that the United States lacks: a broad consumption tax. Kashyap compares it with the taxes major European economies use to fund a large share of public spending. It matters especially in Japan because the population is shrinking and unusually old. A consumption tax shifts some of the burden toward spending by older people, who contribute less through labor-income taxes.

That gives markets a conceivable route through Japan’s fiscal challenge. Kashyap’s view is that a move toward European consumption-tax levels could stabilize the country’s position despite its high debt ratio. The obstacle is political. Raising the tax has proved difficult and can shorten a prime minister’s tenure; cutting it on food may be popular now, but makes the eventual task of raising it harder.

The United States has no comparable obvious revenue lever, Kashyap argues. A major tax adjustment would more likely come through income taxes. Spending cuts would confront the political difficulty of Medicare, Medicaid, and Social Security, which account for a large share of federal expenditure.

Davis questions whether Japan’s tax option necessarily gives it an easier path. Its population is shrinking, he notes, and its per-capita growth prospects may be weaker than those of the United States, limiting its ability to grow out of debt. Kashyap accepts that point but argues that U.S. growth is also insufficient to solve the problem. Aging will keep Social Security, Medicare, and Medicaid spending moving upward, leaving substantial pressure on the Treasury market until the fiscal outlook changes.

The eventual catalyst may be the bond market. Davis cites economist Ken Rogoff’s view that reform will not happen without a crisis, while holding out hope that political leaders might act sooner. Kashyap identifies a nearer statutory pressure point: Social Security will probably reach the point where incoming revenue is below required payments in roughly six years. Senators elected in the current cycle would still be in office, and that could prompt a “grand bargain.”

Anil Kashyap gives Fed Chair Kevin Warsh’s Jackson Hole speech a grade of “incomplete.” The speech clarified how Warsh sees inflation and the policy stance, Kashyap says, but it did not commit the Federal Reserve to a specific response. The next Federal Open Market Committee meeting will show how much practical force that diagnosis carries.

Kashyap considers Warsh’s objection to exhaustive forward guidance reasonable. Telling markets what policymakers will do under every conceivable scenario can be counterproductive and can lock a central bank into choices it would not otherwise make. But Warsh had previously been so vague, Kashyap says, that listeners lacked even a basic sense of his reaction function.

He relays an analogy offered to him: players should be able to focus on the game rather than the referee, but there cannot be a baseball game if nobody knows the strike zone. Warsh’s speech provided more of that missing definition.

Two statements were especially consequential. Warsh said he did not currently view monetary policy as restrictive, and he said the trend in inflation was unacceptable. He also dismissed several easier grounds for complacency, including soft summer inflation readings and contained wage growth. In Kashyap’s view, that removed several arguments for inaction.

Steven Davis describes this as a commitment to discipline rather than a policy decision. Kashyap accepts the distinction, but sees an imminent test. If the committee takes no action three weeks later, Warsh will need to explain clearly what changed.

There are plausible answers. Employment conditions could soften sharply, or inflation could prove more benign than expected. Kashyap does not rule out either possibility. But Warsh did not set listeners up to regard them as his central expectation at the time of the speech.

The institutional question is equally important. Kashyap expects there could be dissents whether the committee raises rates or leaves policy unchanged, and he considers such internal disagreement healthy. But Warsh appeared to align himself with arguments advanced by policymakers who had already believed action was needed. If those officials maintain that position and Warsh does not, the chair will face a demanding explanatory task.