Waller to Speak at Jackson Hole for the First Time: Can the Federal Reserve and Treasury Reach a New "Fiscal-Monetary Accord"?

Federal Reserve Chairman Walsh will publicly speak for the first time at the Jackson Hole Global Central Bank Annual Meeting this Friday, while the U.S. Treasury has quietly started a debt management transformation. The informal coordination framework between these two major policy institutions is gradually taking shape. The market is closely watching whether a modern version of the "fiscal-monetary agreement" will be officially established at this event.

Walsh’s speech is his first public statement since the controversial July rate decision. Meanwhile, Treasury Secretary Besant directly intervened in the market last week by unexpectedly increasing bond buybacks, explicitly stating that "yields do not reflect fundamentals," a clear divergence from Walsh’s earlier stance that "rising yields are a good thing." The mounting tension between these two major institutions has significantly heightened market expectations for urgent policy coordination.

The current situation is putting pressure on both sides. The Federal Reserve faces tough choices about shrinking its balance sheet, as any aggressive action could further push up long-term yields; the Treasury faces roughly $2 trillion in annual deficits and continues to shift its debt issuance towards the short end, making it heavily dependent on accommodative monetary policy. Currently, markets are pricing in a 78% chance of a rate hike this year, raising both the difficulty and necessity of coordination.

This year’s theme for the Jackson Hole meeting is "Financial Innovation: Impacts on Payments and Policy". The agenda itself does not directly address the path of monetary policy. However, expectations for the content of Walsh’s speech have far exceeded the topic framework itself.

Since the July rate decision, U.S. long-term Treasury yields have continued to rise, with some market participants attributing this to Walsh’s communication style. Critics argue that, with inflation exceeding the target for more than five years, he has yet to offer a clear and credible roadmap to control inflation. Term premiums—the extra return demanded by investors for holding longer-term bonds—have risen accordingly.

Mark Cabana, Head of U.S. Rates Strategy at Bank of America Global Research, said: "Walsh’s ‘firm commitment’ to lower inflation is far from enough for the market. We need to hear a concrete plan from the Fed on how to bring inflation down in the face of persistent target misses."

Walsh has stated that rising yields are a positive signal that the market is "feeling its way" after the Federal Reserve removed its official forward guidance. However, this stance is directly at odds with Besant—who, after the Treasury’s unexpected expansion of bond buybacks last week, made it clear that yield levels are detached from the fundamentals.

Last week’s Treasury bond buyback operation is part of a broader transformation in debt management. The Treasury announced that starting in September, it will double the scale of buybacks for long-term, less-liquid bonds, with additional quarterly buybacks reaching about $16 billion. This operation will be funded by issuing new short-term T-bills, which the market has characterized as a "twist operation" from the long to the short end.

In fact, larger-scale twist operations have long been underway. The Treasury continues routine long-term bond auctions while substantially increasing short-term T-bill issuance to meet new borrowing needs. It is estimated that $500 billion in additional short-term T-bills will be issued this year, and if long-term bond auctions do not expand accordingly, this figure will break through $1 trillion by 2028.

The concentration of debt at the short end means much greater pressure on the Fed to maintain low rates. Cabana noted that if Walsh can achieve low rates through a combination of productivity-driven growth and low inflation, the U.S. could save trillions in interest expenses.

However, the current situation is not optimistic. Geopolitical events in the Middle East have pushed inflation higher overall this year, and some policymakers are clearly inclined toward rate hikes. Current market pricing shows a 78% probability of a rate hike this year, which is obviously in conflict with the logic of dependence on short-term debt.

Furthermore, whether there will be enough demand for short-term debt is itself an issue. Besant is viewing stablecoins as an important source of demand—regulations require the issuing entities to purchase U.S. Treasuries, and the stablecoin market is presently about $300 billion, projected to grow rapidly. The theme setting for this year’s Jackson Hole meeting, along with the formal passage of the Genius Act, is expected to make this topic a key point of discussion.

While the Treasury increases the supply of short-term Treasury bonds, the Federal Reserve has been buying T-bills through its Reserve Management Purchases (RMPs) mechanism to maintain adequate reserves for smooth repo market operations. Originally, the plan for this year was to purchase $200-300 billion in short-term Treasuries.

However, the New York Fed announced several weeks ago that RMPs would be set to zero from mid-August to mid-September. Cabana commented: "Current financial conditions are loose, explaining why the Fed paused RMPs. But I expect purchases will resume in the second half of the year to complement balance sheet expansion needed for economic growth and bank lending."

The long-term direction of the Fed’s balance sheet remains highly uncertain. The task force set up by Walsh is expected to submit recommendations on balance sheet reduction by the end of the year. Michael Cloherty, Head of U.S. Rates Strategy at CIBC, said: "Quantitative tightening may start as early as the end of next year. The first step is revising liquidity regulations, which should lower reserve requirements and bring them back to a comfortable range, thus creating room for the Fed to shrink its balance sheet."

The Fed currently still holds about $1.6 trillion in Treasuries with maturities of 10 years or longer. If, in the future, it moves to sell these assets back into the market, it would put further upward pressure on long-term yields. Therefore, Walsh’s tone on long-end yields in his remarks on Friday will itself be a key signal—reflecting just how likely this potential "new agreement" will be implemented.