{"id":16195,"date":"2026-09-04T11:06:06","date_gmt":"2026-09-04T15:06:06","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/?p=16195"},"modified":"2026-09-04T11:06:07","modified_gmt":"2026-09-04T15:06:07","slug":"dog-days-of-policymaking","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/dog-days-of-policymaking","title":{"rendered":"Dog days of policymaking"},"content":{"rendered":"\n

By Atul Bhatia, CFA<\/strong><\/p>\n\n\n\n

Finding his footing<\/h2>\n

\n Fed Chair Kevin Warsh\u2019s Jackson Hole speech last Friday corrected some of\n what we consider to be missteps from his remarks following the central\n bank\u2019s July meeting, when his enigmatic commentary opened the door to\n ideas of potential changes to inflation targets or de-emphasizing interest\n rate policy.\n <\/p>\n

\n The core concern we have with his approach, however, remains unresolved:\n his focus on avoiding forward guidance is depriving markets of necessary\n nuance and context.\n <\/p>\n

\n To be clear, Warsh has a very good point on the pitfalls of the Fed\n committing to giving investors a three- or six-month \u201cheads up\u201d before it\n will consider a rate move. That type of guidance can help in a crisis,\n although it carries risks for the future.\n <\/p>\n

\n But simply discussing how policymakers are thinking should not be an\n issue. Take Warsh\u2019s Jackson Hole speech where he said that the Fed \u201cmust\n be confident that underlying inflation is moving to our objective, clearly\n and at sufficient speed. Otherwise, we have work to do.\u201d\n <\/p>\n

\n It\u2019s a great sound bite, but it leaves important questions unanswered.\n What is sufficient speed? What data will show that it\u2019s going there\n clearly? More importantly, what about the tradeoffs? Would policymakers\n continue to hike rates if unemployment hits six percent? What if stocks\n were down 20 percent or GDP contracted?\n <\/p>\n

\n Obviously, Warsh cannot address every possible set of contingencies, but\n he can discuss how he thinks about those types of tradeoffs and how he\n sees the current balance of risk. The less he discusses these matters, we\n believe, the more cushion investors need to build into their pricing\n models, leading to inefficiencies and underperformance.\n <\/p>\n

\n Policymaking is an art, not a science, and investors need to know if\n they\u2019ve got Jackson Pollock or Diego Vel\u00e1zquez holding the brush.\n <\/p>\n \n

Treasury constrained by economics<\/h2>\n

\n While Warsh\u2019s problem, we believe, is the lack of clear speech and actions\n that align with that speech, U.S. Treasury Secretary Scott Bessent has\n certainly not been shy about acting. Most recently, he has announced bond\n repurchases \u2013 and boasts of a broad toolkit \u2013 to bring down long-term U.S.\n government bond yields. This move, we believe, is unlikely to achieve that\n goal and will serve largely to highlight the relative impotence of the\n U.S. Treasury acting alone.\n <\/p>\n \n

Bond buying binge?<\/h2>\n

\n The attempt to shift yields lower took the form of a promise to \u201cat least\u201d\n double the size of U.S. Treasury bond buybacks to US$4 billion per operation\n with a focus on longer-term maturities. The announcement led to a sharp\n rally in U.S. government bonds, but the gains faded just as quickly with\n yields essentially reverting to their pre-intervention levels.\n <\/p>\n

\n For a bond market intervention to be effective, in our opinion, it needs\n specificity: an impressive dollar amount, matched with a precise yield\n target.\n <\/p>\n

Bessent\u2019s Treasury announcement failed both tests.<\/p>\n

\n First, there may have been a time when $4 billion was a lot, but\n not today. The U.S. recently passed $40 trillion in debt outstanding, so\n the buyback is lacking a zero or two to be impressive. Unnamed officials\n later floated the idea of using the Treasury\u2019s General Account as a source\n of funds, but that is more of an accounting gimmick than a change in\n intervention size.\n <\/p>\n

\n Second, there\u2019s no clarity on price. If Bessent wants to put a line in the\n sand on yields, he needs to draw it, not just hint that it exists. A\n market participant today could buy a 30-year bond at a 5.3 percent yield\n relying on Treasury\u2019s willingness to buy debt, only to find that the\n government\u2019s appetite kicks in at much lower prices. That\u2019s not\n attractive.\n <\/p>\n

\n We\u2019re well aware of Bessent\u2019s background and his role in helping George\n Soros \u201cbreak the Bank of England,\u201d so he obviously knows a thing or two\n about failed market interventions. In our view, Bessent\u2019s real policy goal\n is to slow the pace of any bond selloff rather than putting an end to it.\n By introducing the potential for sharp price rallies, Bessent\u2019s tough talk\n could effectively limit the amount of leverage market participants can use\n to position for higher rates.\n <\/p>\n \n

Fundamentals matter<\/h2>\n

\n While Bessent may be able to impact the speed of a rate rise, we believe\n the fundamentals will eventually reassert themselves. In our view, and as\n we\u2019ve\n recently discussed<\/a>, it\u2019s no mystery why longer-maturity yields are high:\n <\/p>\n