Inflation Hit 3.7%. The Treasury Is Still Buying Bonds to Push Yields Down.

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Updated 1115 ET

The Commerce Department released July personal consumption expenditures on Wednesday. Headline inflation came in at 3.7% over twelve months against a 3.6% forecast. Core held at 3.3%, exactly as expected. Both measures rose 0.2% on the month.

Markets moved to price tightening, not easing. CME futures now put the odds of a September rate increase at 38%, and the odds of an increase by December above 70%.

The federal funds target range sits at 3.50% to 3.75%. Against headline inflation of 3.7%, that puts the real policy rate at approximately zero.

Meanwhile the Treasury is doing the opposite. Its expanded buyback programme, doubled last Wednesday to at least $4 billion per operation, exists to pull long-dated yields down.

Stanley Druckenmiller said the plan “undermines the Treasury market’s credibility and fails to deliver an opportunity for meaningful debt reform.”

The ten-year Treasury sits at 4.665% this morning, a shade firmer. Gold trades at $4,595.10 an ounce. Fed Chair Kevin Warsh delivers his first Jackson Hole keynote as chair at 8:00 tomorrow morning, and he is not expected to signal what happens in September.

Read the two policy settings side by side. Inflation at 3.7% with a real policy rate near zero argues for tightening, which is what the futures market has started to price. A Treasury actively bidding for long bonds to suppress yields is loosening the part of the curve that actually prices mortgages and corporate credit. These are not complementary. One is a central bank leaning against prices. The other is a finance ministry leaning against its own borrowing cost.

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THE OPERATION

Follow the vacuum

Follow the vacuum, not the speech. Warsh took the chair in May with a specific project: a smaller Fed. Shrink the $6.7 trillion balance sheet, stop routine large-scale asset purchases, drop detailed forward guidance, and narrow the mandate back to prices and monetary policy.

He has been explicit about the reasoning. “I want interest-rate policy to be the central bank’s primary instrument,” he told a European Central Bank forum last month. At the July policy press conference he rejected “spoon-feeding” markets or preannouncing decisions. At a Senate Banking Committee hearing he said flatly: “I do not make monetary policy at the direction of the White House.”

The logic is defensible. A central bank with fewer levers offers fewer places for political pressure to land. Reduce the surface area and you reduce the target.

The market charged him for it immediately. When forward guidance was cut back, bond yields rose on what Reuters described on August 7 as an uncertainty premium. Withdrawing from the long end did not calm the long end. It left it unattended.

Twelve days later the Treasury walked into that gap. On August 19 it doubled its buyback capacity in the ten-to-thirty-year sector, the precise maturities the Fed had stepped back from guiding. The relief lasted a day before yields returned, but the precedent did not expire with it.

The independence question arrived in writing the same day. Four Senate Democrats led by Chris Van Hollen wrote to Warsh after the Wall Street Journal reported that he and President Trump had spoken repeatedly since he became chairman, despite published calendars covering his first five weeks showing no such calls. Those calendars do list meetings with other senior White House economic officials. The senators asked him either to confirm in writing that no contact occurred or to amend the calendars, warning of “a perception that the White House is shaping monetary policy.” His predecessor logged calls with the President to the minute.

Independence is a structure, not a sentence. Warsh reduced the Fed’s footprint to shield it from politics, and the footprint did not disappear. It transferred to the one official managing long rates who reports directly to the President. The buyback is now the most active instrument operating on the yield curve, and it sits at Treasury. Whatever Warsh says from the podium tomorrow, the lever moved while he was making the argument for holding fewer of them.

RULES OF ENGAGEMENT

What Friday actually decides

Look under the spending number before trusting the consumer. Nominal outlays rose $36.3 billion in July, but real spending was essentially flat, rising less than 0.1%. Services spending gained $86.2 billion while goods spending fell $49.9 billion. Households did not buy more. They paid more.

Income tells the other half. Personal income rose $115.1 billion, or 0.4%, and disposable income rose 0.5%, both faster than spending. The saving rate sits at 3.0%. People are earning more, spending cautiously, and still watching the basket cost more.

The tariff track runs underneath all of it. The 50% Section 338 duties on roughly $20 billion of Canadian goods took effect Saturday, and Ottawa has promised matching measures the Tuesday after Labour Day. Tariffs raise the price level directly, and no interest rate setting reverses that. If Warsh is asked tomorrow how he separates tariff-driven prices from demand-driven prices, the answer matters more than any hint about September.

Watch 8:00 Eastern tomorrow for one thing specifically. Not the rate signal, which is not expected. Watch whether he addresses the Treasury’s buyback at all. Silence on it concedes the yield curve. Criticism of it opens a public dispute with the Treasury Secretary six weeks before the next policy meeting.

For anything priced off the long end, the operative number is a real ten-year yield near 0.97% against 3.7% inflation, with a fiscal authority actively working to compress it and an inflation print that argues it should rise. Refinancing decisions taken on the assumption that the recent dip in yields is durable are betting on the buyback, not on the data.

The exposure is two arms of the same government pulling in opposite directions on the same curve. Inflation runs at 3.7% with a real policy rate at roughly zero and December hike odds above 70%, which points to tighter money. The Treasury is buying its own long bonds to make money cheaper. The Fed chair who spent his first four months arguing for a smaller central bank speaks tomorrow into a market where the most powerful instrument acting on long rates is no longer his.

*Disclaimer: This is a paid advertisement for Frontieras’s Regulation A offering. Please read the offering circular at https://invest.frontieras.com/. Investments in private placements, and start-up investments in particular, are long-term, illiquid, speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest in start-ups.

Reservation of the ticker symbol is not a guarantee that we will be listed on the NASDAQ. Listing on the NASDAQ is subject to approvals.

Under Regulation A+, a company has the ability to change its share price by up to 20%, without requalifying the offering with the SEC.

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