Last Wednesday, in the first rate hike in over three years, the Federal Reserve raised its benchmark rate—the Federal Funds Rate—by a quarter of a percentage point, to 4 percent.
“Inflation is too high and has been for too long,” Chairman Warsh said in a press conference announcing the hike, adding that inflation had remained above the Fed’s target for more than five years.
This goes against the president’s repeated requests to lower interest rates in recent months (indeed, many saw Trump’s nomination of Warsh as predicated on the belief the latter would cut rates). It also throws a wrench in the plans of Secretary of the Treasury Scott Bessent, the self-proclaimed “leading bond salesman” in America, who faces a mounting debt crisis.
The Government Accountability Office reports that in fiscal year 2026, the Treasury will need to refinance $9.7 trillion, or about a quarter of the national debt. The Joint Economic Committee estimates as much as a third of the national debt will mature within 12 months. Doing so as Treasury yields climb to decade highs poses the risk of massive fiscal costs to pay off interest. Interest payments already surpass defense spending, and will make up an ever larger share of government expenditures when that debt is inevitably refinanced rather than retired (given that spending isn’t coming down).
Warsh raising rates to fight energy-driven CPI inflation undermines Bessent’s refinancing efforts. But the Fed has not been complacent on the Treasury market, increasing its Treasury holdings by $366 billion since December 2025 and $97 billion since Warsh took the job as Fed chair—numbers that dwarf the Treasury’s own $6 billion in buybacks. The Fed appears to be replacing its maturing mortgage-backed securities with Treasury securities, but that isn’t enough to push down yields in the face of the Iran War, rising fuel prices, and the increasingly dire fiscal situation.
And the inflation hawks are also making moves in other major central banks.
The European Central Bank (ECB), concerned by energy shocks and attendant inflation, just raised rates by a quarter of a percentage point to 2.5 percent—its second hike since the war between the United States and Iran began.
The ECB doesn’t seem optimistic about its trajectory, projecting that inflation will stay above 2 percent until at least 2028. This lays the groundwork for future rate hikes, should the conflict continue and inflation persist. An additional inflationary risk that is to some degree already a foregone conclusion is the shrinking gas stores that Europe relies upon for winter.
The Bank of England last week did not raise rates, but still struck a hawkish tone. The Wall Street Journal quoted Bank of England Governor Andrew Bailey:
So far higher global energy costs have had a limited effect on price and wage setting in the U.K. But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise the bank rate.
It’s really at the Bank of Japan (BOJ) where the shenanigans are most interesting. Bessent has made himself into a fiscal disciplinarian for the Japanese government and central bank, in an attempt to stave off a potential fiscal crisis for the largest foreign holders of U.S. Treasuries.
The yen plummeted against the dollar in August, leading the Treasury Department to engage in drastic measures to halt its fall—lest the Japanese have to sell their Treasuries to get the dollars necessary to buy yen. The Treasury boosted the yen by purchasing some of the currency, but is bound by the Exchange Stabilization Fund’s budget in ways that the Federal Reserve may not be.
Bessent wants to avoid Japan selling off Treasuries, which would push down bond prices and increase yields. He publicly encouraged the Federal Reserve to increase the cap of its repo facility (the Foreign and International Monetary Authorities) to accommodate stabilization of the yen.
Using these facilities, the Federal Reserve gives the Japanese dollars that they will use to buy yen. In exchange, they are temporarily given the Bank of Japan’s U.S. Treasuries as collateral—which will be repurchased later with interest. This boosts the yen through purchases by the BOJ, but doesn’t change the secondary Treasury market itself.
The Fed did not act on Bessent’s call to raise the cap at the most recent Federal Open Market Committee meeting, but the Treasury secretary went further to encourage the Bank of Japan to help the Japanese government get its house in order.
Bessent views the Japanese as partially to blame for the yen slipping. Low interest rates have helped push the yen down, which puts Japan’s position on Treasuries in a precarious situation. By raising short-term rates to 31-year highs, the Bank of Japan was able to prevent itself from selling too many U.S. bonds under the cover of fighting inflation.
And inflation has become a new problem for Japan. While the central bank’s target is 2 percent, and inflation is 1.7 percent, the BOJ is still anxious to address rising prices stemming from the Iran War’s energy shock and the falling yen. Thus its rate hike was not unexpected, but is entangled with Secretary Bessent’s claims that he has “pretty good insight into what the Japanese, what the Bank of Japan is going to do.”
“I am the house now,” he said.
In recent months Bessent has put public pressure on the Japanese government to get its fiscal situation under control so that its spending wouldn’t undermine the BOJ’s battle against inflation. If Japan’s bond yields rise while spending continues to grow, it will create larger issues for the Treasury, making the motive behind Bessent’s call for higher rates and fiscal tightening quite clear.
It appears that Bessent can wheel and deal his way into a favorable interest rate decision with the Bank of Japan. The Federal Reserve appears less amenable; as the Iran War and unrestrained spending continue to frustrate the administration’s desire for lower rates and lower prices.
Warsh has given an answer to the question, “Is he his own man?” But the White House may not like it.
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