The Treasury is becoming a shadow central bank, eroding the independence of the Federal Reserve's monetary policy.

Author: Bao Yilong, Wall Street Insights

The U.S. Treasury continues to expand the scale of Treasury bond financing, making its function increasingly resemble a de facto currency issuing institution, and gradually intervening in the Federal Reserve's domain through quasi-monetary policy operations.

On September 2, Bloomberg macro strategist Simon White pointed out that this trend will structurally push up inflationary pressures, weaken the Federal Reserve's policy independence, and pose greater risks to market stability and real returns on stocks and bonds.

Currently, Treasury bonds account for 22.7% of the outstanding U.S. debt, exceeding the informal 20% limit set by the Treasury. If the portion held by the Federal Reserve is excluded, this proportion rises to 24.1%.

White believes that as the fiscal deficit continues to expand, this ratio is expected to climb further, and the policy interest rate will no longer be just a core variable of monetary policy, but will become a key anchor point determining fiscal stability. This structural shift means that if the Federal Reserve attempts to control inflation through interest rate hikes, it will face stronger political and fiscal resistance. This is because raising interest rates directly increases the government's financing costs, effectively tightening fiscal policy and thus exerting reverse pressure on monetary policy. White bluntly states that, given the continued expansion of Treasury bond issuance, finding an interest rate level that simultaneously meets inflation targets, maintains financial stability, and prevents government borrowing costs from spiraling out of control is perhaps an impossible task. From Financing Instrument to "Shadow Currency": The Evolution of the Role of Treasury Bonds

Treasury bonds have always been a standard tool for short-term financing for the U.S. government, but White points out that the Treasury Department is intentionally replacing long-term bonds with Treasury bonds to absorb the financing needs arising from the expanding fiscal deficit.

From Financing Instrument to "Shadow Currency": The Evolution of the Role of Treasury Bonds

Treasury bonds have always been a standard tool for short-term financing for the U.S. government, but White points out that the Treasury Department is intentionally replacing long-term bonds with Treasury bonds to absorb the financing needs arising from the expanding fiscal deficit.