Woofun AI reports that the US Treasury has initiated direct buybacks of long-term bonds, a move that immediately establishes a high-stakes conflict with the Federal Reserve over the management of long-term interest rates. This intervention, characterized by a significant increase in operational scale, highlights the growing friction between fiscal authorities and monetary policymakers, specifically involving key figures such as Bessent and Warsh, as the government attempts to control its own financing costs without formal coordination from the Fed.

The mechanics of this intervention reveal a substantial escalation in scale, with the maximum size per operation increasing from 2 billion to at least 4 billion. While this action is distinct from Yield Curve Control (YCC) in both definition and the entities involved, it represents a direct government intervention in its financing costs. The debate over the long-term efficacy of such measures is secondary to the critical question of how far the government is willing to go and what sacrifices it is prepared to make to stabilize yields. This approach bypasses traditional market mechanisms, signaling a willingness to use fiscal tools to manage debt servicing expenses directly.

Policy divergence has become increasingly apparent, particularly following statements made at Jackson Hole. Warsh's nuanced remarks contrast sharply with market expectations for rate hikes and increased communication to reduce policy uncertainty. Despite frequent interactions with Bessent, Warsh has not adopted a hawkish stance; instead, recent minutes indicate an attempt to reduce the frequency of communications. This clear divergence underscores a fundamental disconnect between short-term tactical maneuvers and long-term strategic goals, with the Treasury acting unilaterally while the Fed maintains a more cautious and less communicative posture.

Structural deficit drivers remain the core challenge, with the deficit ratio determined by two primary components: the economic growth rate and spending levels. Spending levels are unlikely to fall and may even rise significantly in the fall and next January, exacerbating the fiscal burden. To address the deficit ratio, reliance must be placed on economic growth, but the economy is currently divided into traditional industries and technology sectors. It is nearly impossible for the US to reduce its deficit ratio through traditional industries, leaving technology as the sole hope for achieving higher economic growth and lowering the deficit ratio.

The tech narrative, particularly around Generative AI (GAI), has shown signs of weakness over the past six months, prompting the need for new narratives to sustain growth. The White House, along with Bessent and Warsh, favors a strategy that emphasizes the need for more financing, credit, and economic growth to reshape the supply chain and advance technology, while also addressing populist concerns. Powell's insistence on price stability is viewed as insufficient without economic positives to reduce the deficit ratio. Suppressing demand now may be a matter of monetary discipline in the short term, but it could be a policy error in the long run if it hinders the growth necessary to manage the deficit.

Market dynamics suggest that rate hikes can curb long-term interest rates and increased communication can narrow the term structure spread, but these measures do not solve the underlying strategic challenge. The Fed faces a difficult task in the medium to long term: how to facilitate huge investment in technology and supply chain reshaping while minimizing discomfort for the American people. This challenge is compounded by the need to manage the term structure spread and maintain market confidence. The Fed's stance in the coming days will be critical, with Warsh's potential willingness to share his thoughts serving as a turning point that could influence how the Fed views this issue in the short term.

The three prices of money—interest rate, exchange rate, and inflation—are increasingly interconnected, with inflation becoming harder to control and the market rejecting interest rate solutions. Bessent, who previously supported a strong dollar, is now trying to buy time regardless of the dollar's exchange rate. This pivot reflects a recognition that the traditional tools of monetary policy are insufficient to address the current fiscal and economic challenges. The focus in the short term is on whether the Fed will cooperate with the Treasury's actions, but the underlying logic suggests a need for a more comprehensive approach that addresses all three prices of money.

Woofun AI data shows that historical precedents for intervention in long-term interest rates include three distinct periods: from 2000 to 2002, when the Treasury conducted buybacks to enhance the liquidity of benchmark securities; from 2011 to 2012 and in the 1960s, when the Fed carried out distortion operations on a larger scale; and during World War II, when true wartime YCC was implemented with short-term and long-term debt interest rates directly fixed. Currently, the US is at most at level 1 or level 1.5 of intervention, with the potential to reach level 2 if the Fed gets involved. These historical examples highlight the varying degrees of intervention and the importance of coordination between fiscal and monetary authorities.

The US economy exhibits a K-shaped structure, with the downward part still stuck in trouble and the real estate market showing seemingly good numbers due to higher prices. The narrative surrounding the upward part of the K-shape has weakened, indicating overall poor economic prospects. Bessent's administrative actions are aimed at eliminating certain market bets and managing the term structure spread, which has widened rapidly over the past month.

However, these actions are symptomatic fixes that do not address the root problems of the economy. The Fed's stance on gold will depend on whether it believes rate hikes are necessary to curb long-term interest rates or if easing policies are needed to stimulate supply and boost competitiveness.

Many of America's current problems, including the mess in the Middle East and massive AI investments that have not yielded reasonable returns, cannot be solved by fiscal or monetary policies alone. Technical bureaucrats' actions do not address the core problems, and the need for reform grows day by day, but the feasibility and motivation for reform decline. Successful reforms, such as the Two-Tax System in the Tang Dynasty, were subtle and massive, while reforms driven by ideology often fail due to opposition.

Wall Street financiers like Jamie Dimon and Ray Dalio have wiser views, emphasizing the need to fight wars to the end and accept the difficulty of rate hikes. The era is full of rapid narratives, but the underlying logic remains unchanged: many things require time and cannot be achieved through shortcuts. If the Fed joins in regulating long-term yields and the Strait of Hormuz ends up in a messy situation, it would be a sufficient catalyst to discuss the dusk of the dollar. Until then, the Treasury's actions are seen as a short-term attempt to cope with seasonal and geopolitical disruptions.