Bissent: The White House's "Shadow Fed Chair"?

The Federal Reserve’s routine operation of announcing the purchase of $40 billion in short-term government bonds has been interpreted by market analysts as a sign of an impending major upheaval, with the Treasury’s reach seemingly crossing a red line of nearly a century of institutional boundaries.

TS Lombard Chief U.S. Economist Stephen Blitz presents a startling view in a report: the balance sheets of the U.S. Treasury and the Federal Reserve are moving toward a de facto “merger.”

A symbolic marker of this change is that Treasury Secretary Janet Yellen may become the actual “shadow Fed chair,” by arranging trusted aides into top positions at the Federal Reserve, establishing a direct reporting line to the White House.

1. Policy Shift

● On December 11, the Fed announced an operation to start purchasing $40 billion in Treasury bills this month, with plans to gradually reduce the scale of purchases at some point next year. On the surface, this appears to be a technical operation to address the expansion of the Treasury’s general account and manage monetary market rates.

● However, Blitz’s analysis points to a deeper intention: the Federal Reserve is essentially providing financing guarantees for the Treasury’s spending plans, ensuring government funding isn’t hindered by interest rate fluctuations.

According to this logic, the traditional function of the bond market to send “excessive spending” warnings through interest rate changes is becoming ineffective.

2. Structural Reconfiguration

● Behind this policy shift is the formation of a new power structure. Analysts note that once potential candidates like former Trump economic advisor Kevin Hassett enter the Fed, Yellen could become their de facto “boss.” Blitz describes a “unitary presidential authority theory” becoming a reality, with daily policy coordination conducted directly through Yellen.

● U.S. media in July listed potential candidates for the Federal Reserve Chair under the Trump administration, with Hassett seen as the top contender, and Yellen herself also mentioned. Yellen previously publicly suggested establishing a “shadow chair” to counterbalance Chair Powell.

● Under this framework, the core goal of the Treasury is clear and direct: to obtain cheap financing costs. The specific strategy involves injecting liquidity into short-term markets while limiting long-term bond issuance to lower government borrowing costs.

3. Red Lines in History

● The independence of the Federal Reserve is not inherently solid; it has been shaped over nearly a century through institutional development and political struggles. In the 1970s, then-Fed Chair Arthur Burns sharply cut interest rates under Nixon administration pressure, which was seen as a key factor leading to the U.S. inflationary crisis.

● Today, signs of political interference are even more evident. Trump publicly called for the federal funds rate to be lowered below 1%, claiming this would save the government trillions in debt costs.

● Such tendencies to politicize central bank policy tools have already raised concerns on Wall Street. JPMorgan Chase CEO Jamie Dimon warned that interfering with the Fed’s independence could have negative consequences.

4. Internal Disputes

● There are clear disagreements within the Fed regarding this trend. Dallas Fed President Lorie Logan and Fed Governor Michelle Bowman strongly oppose the idea of balance sheet merging from a “philosophical perspective.”

● They advocate restoring short-term market volatility to allow market signals to function again. Blitz believes this philosophical stance may ultimately give way to “political realities and practical operations.”

● Notably, the official Fed forecasts for future interest rates have changed. Blitz points out that compared to September, the number of FOMC members expecting the federal funds rate to be below 3.5% in 12 months has increased from 11 to 16.

● The Fed’s December economic projections show that the median core PCE inflation expectation by 2026 is 2.5%, down from 2.6% in September, indicating a slow downward trend.

5. Inflation Warning

● Blitz’s report issues the most severe warning about future inflation. He predicts that strategies aimed at providing cheap funds to the government will lead to higher inflation levels by 2026. Although the Fed’s current outlook for core inflation has been lowered, with fiscal stimulus and monetary policy working together, “inflation will re-emerge as the dominant story in the next one or two years.”

● The report presents a two-stage scenario: in the short term, the economy may weaken, prompting the Fed to cut rates; but in the long run, “the overall trend is inflationary.”

● Blitz concludes that unless economic performance in early 2025 is weaker than expected, inflation will “re-emerge later in 2026 or 2027.”

6. Market Pricing

● The gold market has already responded to potential changes in monetary policy. In December, the Fed lowered the policy rate to the 3.50%-3.75% range, reducing the opportunity cost of holding gold. At the same time, the Fed announced the purchase of about $40 billion in short-term Treasury bills to ease market liquidity pressures, supporting gold prices.

● Market analysts note that in the context of an confirmed rate cut cycle and easing market liquidity, the medium-term “pricing anchor” for gold leans more toward declining real interest rates and rising safe-haven demand. Central banks’ continued gold purchases further reinforce the pattern of “high volatility and upward price centrality” in the gold market.

7. Future Game

● The leadership of the Federal Reserve is about to change. Chair Powell’s term ends in May 2025, and a new management team will take over. Blitz believes that Powell’s speeches on the new policy framework “have become meaningless,” as the transfer of power will bring a new policy direction.

● The Trump administration’s economic team is seeking a “more obedient” Fed chair to achieve the goal of significant rate cuts before the midterm elections to stimulate the economy. If this political-driven monetary policy trend materializes, it could repeat the “Great Inflation” of the 1970s.

Economic Indicators

Federal Reserve December 2024 Forecast (Median)

Market Focus

2025 Core PCE Inflation

2.5%

Synergy of Fiscal and Monetary Policies

2026 Core PCE Inflation

2.5%

Lagging Effect of Cheap Financing Strategies

End of 2025 Federal Funds Rate

3.9%

Speed of Rate Cuts Under Political Pressure

Long-term Federal Funds Rate

3.0%

Final Neutral Level of Monetary Policy

Blitz describes the reliability of forecasts based on conventional fiscal and monetary norms as “precarious.”

Gold prices have already hit historic highs, with markets voting with capital on the uncertainty of future currency values. When Fed Chair Powell’s speeches are deemed “meaningless” by analysts, and the Treasury Secretary may become the real “shadow chair,” the fundamental rules of the financial market are quietly transforming under tectonic pressure.

The outcome of this transformation will determine the direction of global capital over the next decade.

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