5% Rates, Bessent's Failed Gamble & What Comes Next w/ Krishna Guha | The Real Eisman Playbook Ep 78

Krishna Guha attributes the stalled final stretch of disinflation more to President Trump’s trade and shooting wars than to Powell, while saying Kevin Warsh worried that inflation above the Fed’s 2% target for more than five years could influence wage and pricing expectations. Guha expects inflation to ease as tariff effects leave the data and sees no lasting inflation impulse from oil, though he says higher refined-product prices—especially diesel, which doubled over a relatively short period—are adding near-term pressure to inflation and bond yields.

Guha says Warsh’s supply-side framework emphasizes productivity and incentives to work rather than the demand-focused approach Guha describes. Warsh also favors limiting QE largely to emergencies and believes it continued too long after the financial crisis and pandemic; Guha, by contrast, says QE can support demand through wealth effects and lower corporate borrowing costs, while the host worries that ending forward guidance could heighten alarm.

Guha says AI hyperscalers’ borrowing is competing with Treasury issuance while the government runs a deficit of 6% of GDP, pushing borrowing costs higher as more borrowers compete for capital. He argues that a multi-year AI investment boom could raise the normal interest rate, and says long-term borrowing costs might need to reach around a 6% handle to impair AI investment, with AI stocks potentially under pressure sooner.

The Treasury buybacks were intended to retire less-traded, high-yielding bonds and replace them with securities investors preferred, with short-term bill issuance financing purchases of longer-term bonds. But Guha says the program was too small to move the $40 trillion Treasury market, failed to damp 10-year yields around 5.25%, and may have weakened confidence; he also says the buybacks could signal a future shift toward shorter-duration borrowing.

Guha says the administration and Fed are considering liquidity-rule changes that could encourage banks to hold fewer Fed reserves and more government debt, potentially supporting Warsh’s goal of a smaller Fed balance sheet. He expects Warsh to pursue that reduction cautiously, waiting for stable bond-market conditions and lower yields before gradually reducing holdings rather than immediately selling bonds.