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Will Trump Preside over the Wedding between the Fed & Treasury? And what would it mean for Markets?

Brent Johnson argues that the Federal Reserve and Treasury may become more closely aligned, although the timing and whether that shift is voluntary or forced remain uncertain. He distinguishes their separate mandates while highlighting how Treasury cash flows, debt issuance, Fed operations, and the dollar system increasingly overlap. The discussion also challenges the idea of a broad foreign retreat from U.S. Treasuries and explains how reserves, lender-of-last-resort support, and consolidated balance sheets shape the monetary system.

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Key Takeaways

Brent Johnson argues that the Treasury and Federal Reserve are likely to become more closely aligned regardless of which party controls Washington, although the timing and whether the process is voluntary or forced remain uncertain. He links this trend to a broader historical shift and weakening global cooperation, while noting that the Treasury controls borrowing, spending, debt maturities, and dollar policy and the Fed controls monetary policy and the price of money.

Johnson says the Fed has operational autonomy but not constitutionally guaranteed independence: Congress created its stable-prices mandate, while the 1950s Fed-Treasury Accord established autonomy by precedent. He also identifies an ongoing tension between the government's preference for lower borrowing costs and the Fed's use of higher rates to pursue price stability.

Treasury cash management can materially change the level of bank reserves because the Treasury General Account and reserves are held at the Federal Reserve. Tax dates, refunding settlements, and debt-ceiling changes can drain or rebuild reserves, but Johnson distinguishes those balance-sheet effects from formal monetary-policy decisions.

The rise in the 10-year Treasury yield to its highest level in a year after the Fed's rate hike does not, by itself, show that Donald Trump or Scott Bessent are at war with the Fed. Johnson also says foreign Treasury holdings are at an all-time high and that the roughly $3.5 trillion accumulated by foreign buyers indicates sustained demand rather than a wholesale bond boycott.

The Treasury controls how much debt to issue or buy back and its maturity structure, while primary dealers are required to take down every auction, preventing a formal failed auction or Treasury default. Weak demand can still force Treasury yields higher, and Johnson notes that Treasury issuance and Fed balance-sheet operations can affect different portions of the same yield curve.

FED-TREASURY

Institutional Convergence — Brent Johnson argues that the Federal Reserve and Treasury are likely to become more closely aligned, regardless of which political party controls Washington. The timing and whether the process is voluntary or forced remain uncertain. He attributes the convergence to a broader historical shift and weakening global cooperation, not Donald Trump's policies alone.

“But what I do know is that from a glo on a global basis, the world is no longer cooperating and the world is no longer globalizing…”—

Separate Policy Powers — Johnson distinguishes the Treasury and Federal Reserve as institutions that control different levers of the dollar system. The Treasury borrows, spends, manages debt maturities, and sets dollar policy, while the Fed sets monetary policy and the price of money.

“The Treasury U borrows and spends whatever the Congress approves. The Fed sets the price of the money that is involved in the borrowing and the spending…”—

Operational Fed Autonomy — Johnson argues that the Federal Reserve has operational autonomy but not constitutionally guaranteed independence. He says Congress imposed the stable-prices mandate and could take back the Fed's independence, while the 1950s Fed-Treasury Accord established its autonomy by precedent.

“It was not elected by the people and it is insulated by statute but it is not insulated by the constitution. That is a very big difference…”—

GLOBAL-DOLLAR

Sustained Treasury Demand — Despite de-dollarization concerns, foreign buyers have continued accumulating U.S. Treasuries by roughly $3.5 trillion. Johnson says the data shows sustained international demand rather than a wholesale bond boycott.

“Despite all of the de-dollarization talk, despite all of the nonsense that nobody wants to own treasuries anymore, on a net basis, the rest of the world has continued to…”—

China's Closed Market — Johnson attributes China's unusually low interest rates partly to its closed financial system, where 96% of bond holdings are domestic. He links demand for Chinese bonds and gold to deflation in Chinese real estate and equities, as well as distrust of the yuan.

“The one outlier to this is China. Chinese rates are low but Chinese rates are low because it's a closed market. It's not an international market…”—

MONETARY-MECHANICS

Reserves And Credit — Johnson argues that bank reserves are not lent directly to borrowers. Instead, they serve as collateral supporting new money creation in a debt-based monetary system.

“And the reason that's important, as we have said many times, bank reserves are not what gets put into banks and then lent out…”—

Lender Of Last Resort — Johnson describes the Federal Reserve's lender-of-last-resort function as a safeguard for the monetary system and government stability.

“The final thing that the Federal Reserve does and this is true of any central bank. They are there to be the lender of last resort…”—

TREASURY-MARKETS

Yield Surge — The market's reaction to the Fed's rate hike pushed the 10-year Treasury yield to its highest level in a year. Johnson cautions that this move alone does not show that Donald Trump or Treasury Secretary Scott Bessent are at war with the Federal Reserve.

“But with the with the way the market reacted to the Fed hikes, the 10-year yield finished at its highest point in a year and many years and higher on…”—

Foreign Treasury Demand — Foreign holdings of U.S. Treasuries are at an all-time high, and Johnson says the market has not seen bond vigilantes broadly reject Treasury debt. Higher yields, he says, should not be treated as evidence of a wholesale collapse in foreign demand.

“So foreign holdings of treasuries is at an all-time high and we have not seen the bond vigilantes show up in spades totally rejecting the US Treasury.”—

Fed Treasury Marriage

The speaker argues that closer Fed-Treasury coordination is increasingly likely, though its timing and whether it happens voluntarily or under pressure remain uncertain.

Foreign Treasury Demand

Foreign holdings of Treasuries remain at an all-time high, challenging claims that de-dollarization has produced a broad international boycott of U.S. government debt.

Beyond Trump’s Presidency

The speaker says Fed-Treasury alignment is not merely a Trump initiative but reflects broader historical and geopolitical forces likely to persist across administrations.

Two Institutions, One Dollar

Treasury borrowing and spending decisions interact with the Fed’s control over money’s price and bank reserves, making the dollar central to both institutions’ power.

Treasury And Fed Roles

Treasury represents elected government and manages taxes, spending, sanctions, dollar policy, and debt issuance, while the Fed conducts monetary policy and manages reserves.

Fed Monetary Mechanics

The Fed sets overnight rates, influences borrowing costs, manages reserves, supervises banks, supports asset prices, and serves as lender of last resort.

From Rules To America First

The speaker expects both institutions to become more proactive as the United States shifts from a rules-based global order toward an America First framework.

Fed Treasury Accord

The postwar Fed-Treasury Accord established operational autonomy for the Fed, but congressional oversight and political pressure demonstrate that its independence is limited.

Consolidated Balance Sheets

Because the Fed holds Treasury securities and returns their interest income, consolidating the two balance sheets could effectively eliminate a substantial portion of outstanding government debt.

Dollar Access And Liquidity

Treasury sanctions can restrict dollar access while the Fed can restore liquidity through swap lines and FIMA repos, giving the United States complementary monetary levers.

Policy Friction And Independence

Treasury seeks lower funding costs while the Fed prioritizes price stability, creating friction over rates, debt issuance, reserve management, and the institution’s nonconstitutional independence.

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Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

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