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>> And that does bring us to our top story

for the hour, the direct intervention by

the Treasury to control the costs of the

$40 trillion US debt pile. The

historical track record of such invent

interventions are spotty. The two most

recent successes, first the treasuries

repurchase in the early 2000s of about

67 billion of primarily longerdated

bonds. It was a protracted operation

that did actually push the 30-year yield

down by about two percentage points from

67 to 46 over about a 2-year stretch.

And then second, there was Operation

Twist in 2011. That was a duration

management scheme where the Fed, not the

Treasury, bought $400 billion of

longerterm treasuries while selling an

equal amount of short-term debt. Now,

Besson's actions so far seemed to be

standalone independent, which is curious

given that two years ago, he blasted his

predecessor at the Treasury, Janet

Yellen, for what he characterized as an

attempt to re-engineer the world's

largest bond market. But it's also

curious timing for all of this as Fed

Chair Kevin Worsh preps for his own

communications moment, a speech Friday

at Jackson Hole, Wyoming that ostensibly

is supposed to be about some of the

wonkier, more procedural matters out

there. But no doubt there will be high

attention as to whether wars is willing

to formally aid in Bessant's

intervention and whether he'll actually

offer a more detailed explanation of the

path for Fed rates. Torstston, he joins

us right now. He's the chief economist

over at Apollo and he joins us right

now. And Torstson, I want to start first

with Scott Bessent. uh what the Treasury

is exactly trying to do and whether

history might actually be at his side

with regards to the potential

effectiveness of some of this bond

buying.

>> Well, the first thing is that it really

is three things. He started with the Yen

intervention that was pushing long rates

down. Then he had the FEMA intervention,

the 2 billion went to 4 billion, which

also has been pushing rates down. And

today we heard some talk about well

maybe the Treasury general account will

also be used to lower long-term interest

rates. So there's almost a almost

campaign from the Treasury here in an

attempt to try to put a cloud over rates

markets that is attempting to try to

limit how much rates can be going up. So

on their own these initiatives have had

so far a more limited effect. But the

fact that this cloud is hanging over the

market that suddenly something could

happen especially if the TGA the

Treasury general account for the

Treasury the Fed account of the Treasury

account of the Fed is being used that

could potentially have a bigger impact.

Well, well, well, when we talk about the

bigger impact though, I I would assume

the number, the dollar figure has to get

a little bit bigger than just 2 to four

billion or whatever he said he might go

up to here. I mean, is there a number

that you look at where you think that a

would have an impact, but more

importantly a lasting impact?

>> Yeah, that's why today's news about the

Treasury General account, which really

is the Treasury's like checking account

at the Federal Reserve, that has more

than $900 billion in it at the moment.

And that could potentially be a much

bigger impact on the market because the

threat of using as much as hundreds of

billions of dollars on buying long rates

could potentially have some

implications. But that being said, a

checking account always needs to be

refilled with new issuance. So in that

sense, it's really more the threat of

this happening at some point that is

having the biggest impact.

>> Well, well, that's what I'm curious

about, too, is would you even need to

tap that? Because I mean I think back to

when the ECB did something similar uh

and they never actually made good on it

cuz they didn't have to. It was just the

idea that they said they would do it if

necessary was enough uh to scare the

market into sort of uh towing the line.

>> That's exactly right. So that's why it

really ultimately is very similar to

currency intervention from a central

bank. If you say as a central bank that

we may step in and do something, we may

stay in and buy or sell our own

currency, then that on its own could

also be a very important factor. When

you then think about the risk that this

as a headline could potentially begin to

weigh in this case on rates and

potentially suddenly create a drop in

yields because of the Treasury deciding

to do something. So that is probably

shaking out some of the people who are

now betting on rates moving higher. But

it gets to this idea though if I mean if

we do get to a general account situation

where they're either threatening to use

it or actually use it. This goes far

beyond debt management. I mean and now

we're um you know I don't know what we

call it is it I mean I don't want to

call I don't want to use the the QE word

or the uh maybe it's just yield curve

control. I mean how would you

characterize that if we do get to that

stage?

>> Yeah. So the underlying dynamics are of

course that rates are going higher

because inflation has been higher and

the fiscal situation unfortunately has

also putting upward pressure on rates.

So therefore those fundamental forces

are still in place at the moment. So for

that reason these are certainly more you

could call spotty interventions that are

trying at certain points to limit how

much rates are going up. But that being

said, it's still a cloud hanging over

the rates market that this could now the

third item coming along with the Tur

general account also now suddenly being

in play. That also means that suddenly

these things could suddenly jerk rates

much lower and because of that that

still is something that likely will

begin to put some limit on how much

rates can go up because you can suddenly

be jolted down to a lower level.

>> Does it matter that at least as of right

now this is the Treasury Department

going alone and the Fed at least based

on what we know is not actually involved

in any of this. Do you think that would

change? Yeah, that does matter because

at the moment the Treasury of course is

living under the condition that there is

a budget deficit which in round numbers

is like 5 6% of GDP. That's not going to

change and if that's not changing that

means that there's still a need to

finance the government deficit and as a

result of that government debt levels

are still going up. So in that sense

these things are all smaller things that

are happening on the fringes because on

their own they're not changing the

fundamental forces that are driving

rates higher. Namely at the moment

higher inflation and also the fiscal

situation. Well, let's talk about some

of those fundamental forces. I mean,

obviously, we've talked a lot on this

program, the for near $40 trillion debt

load. Obviously, the servicing load

again. I was just looking at uh uh just

the interest payments projected for Q4,

and I think it was close to $200

billion. I mean, which is insane. So,

this that's not something the Treasury

can solve on its own. Certainly, not

even the Fed can solve on its own.

That's something in theory that Congress

would have to address. And as far as I

know, it doesn't look like they're ready

to do that.

>> Yeah. And the risk with interventions in

any shape and form in lowering loan

rates is that if you issue more in the

front end that has two risks. First of

all, it lowers the weighted average

maturity of debt outstanding. That means

that the weighted average maturity of

what is the debt level in terms of

duration that will become lower. In

other words, we will simply get that

much more debt is now in the front end.

And the second risk with that is that if

much more debt in particular is in T

bills that means that it becomes much

more sensitive to what the Fed is doing

because now a bigger share of debt

outstanding is in the very very front of

the yield curve. So if Kevin WS decides

to raise rates at one of the upcoming

meetings that means that debt interest

payments will go up because there now is

more sensitivity now that more debt is

in T bills.

>> Well on that point though I mean if the

weighted average maturity goes down I

think right now it's around like 5 and a

half 57 or something like that. Exactly.

Um and that's because of the shorter end

stuff. Does that by I want to say by

default but does that mean that does

that put upward pressure on the average

interest rate that we have on that debt

overall?

>> Yeah. So it means that you certainly

become more dependent in the front end

because now you have more debt in the

front end that then depends on what the

Fed is doing. What happens in the long

end becomes certainly a very important

question around how does the long end

interpret what's going on. If the long

end says everything is great no we don't

need to have high rates. We can now

begin to go down. Then you would have

that the debt servicing cost would go

lower. But if the long end begins to

say, hey, we have some fundamental

forces that are still at play and these

have not changed, then of course the

long end could go higher. And as a

result, the net effect would be you're

both more sensitive to higher rates from

the Fed in the front end. But you now

also would see the term premium where we

see long rates go up because now the

market is beginning to question either

the Fed's commitment to 2% inflation or

also the overall the fiscal situation

where now debt levels still again

continue to go up. Do do you have any

expectation that Kevin Walsh will

address this in his Friday speech?

>> I think at Jackson Hole that he will

probably be focusing more on the

economic outlook. He'll probably

focusing more if anything on the

framework that the Fed is having at the

moment just to try to address some of

these criticisms that he has seen in

terms of the last press conference where

a lot of people said yes we understand

that forward guidance may be going away

but now instead we should be focusing on

framework guidance. Tell us what is the

framework? Are you focusing on the

balance sheet? Are you focusing on

tightening financial conditions? Are you

focusing on the Fed funds rate? What are

the tools you're going to use to tighten

monetary policy to try to get inflation

to come down?

>> You think he will do that? He seems like

he does not want to be that

communicator.

>> So that's why I think that most of the

discussion will probably not be so much

around the task forces. It probably

don't want to preempt what they're going

to deliver later this year, but it's

probably going to focus more on what is

the economic situation at the moment and

therefore less on the overall framework

for communication for the balance sheet

for data that he has in the task forces

but really more just laying out what is

our view on the economic outlook at the

moment without giving any forward

guidance. It was interesting looking at

the last minutes and some of the

anecdotal evidence that came out prior

to that about uh a big focus on

artificial intelligence and how it's uh

affecting either productivity or

inflation or vice versa depending on

your perspective. Do you think this will

become much more of a dominant

conversation uh not only at the next Fed

meeting but for the next couple of Fed

meetings?

>> Yes, I do think that this is becoming

very important exactly for the reasons

you're mentioning namely that at the

moment because the AI built out requires

hiring more people. It requires buying

more memory, more chips, more equipment,

buying land. It also involves

construction. That means that in the

near term AI is actually inflationary.

But once AI is adopted and deployed and

implemented, then we should expect to

see that AI will be disinflationary. And

we'll probably also have some important

impact when we think about who it is

that's impacted. namely we could almost

begin to see a reversal of the K in the

K-shaped consumer whereby the high end

is going to see lower wage growth is

going to see lower job growth whereas

the lower leg of the K blue collar

workers are probably going to ultimately

still see stronger wage growth

ultimately also going to see better job

growth because AI is mainly hurting

those who have more skills who have more

education

>> all right Dorson got to leave it there

really appreciate it Dorson Slock chief

economist over at Apollo