Trump's Poll Numbers Decline, Bond Market Out of Control: Is Walsh's Independent Space Opening Up?

Analysis suggests that the rise in U.S. Treasury yields, coupled with Trump's declining poll numbers, has unexpectedly increased Federal Reserve Chair Walsh's independent policy space. Powell's continued presence on the board provides political cover, while rising yields also help suppress inflation. With deep ties to Treasury Secretary Basent and changing external conditions, Walsh is demonstrating unexpected strategic resolve and governance space.

The tension between Federal Reserve Chair Walsh and the White House is evolving in an unexpected manner. As Trump's approval ratings come under pressure and Treasury yields rise, Walsh's policy leverage is quietly increasing, making it unlikely that he will succumb to pressure to cut rates at Wednesday's meeting.

Last week, as the 10-year Treasury yield approached 5%, Treasury Secretary Basent launched a $6 billion bond buyback plan in an attempt to lower yields, but it failed. Meanwhile, Walsh's speech at Jackson Hole, where he pledged to firmly combat inflation, earned him cautious recognition from some former critics and shifted market perceptions of his policy stance.

Prediction platform Polymarket indicates that the market's expectation of a rate hike at this meeting has surpassed 50%. Nevertheless, according to Gillian Tett, a columnist for the Financial Times, the Federal Reserve may choose to act only after the midterm elections. However, a more noteworthy signal is that the political calculus surrounding the Federal Reserve has changed, with Walsh demonstrating strategic capabilities and governance space earlier than the market anticipated.

Powell's Continued Presence on the Board Provides Unexpected Cover for Walsh

In May of this year, Powell stepped down as Federal Reserve Chair but chose to remain on the board in a rare move, informing friends that he would hold his position until Trump clearly abandoned his threats of prosecution.

This arrangement led many observers to believe that Walsh would feel uncomfortable, but the opposite turned out to be true. Tett analyzes that Powell had long served as a target for Trump's economic grievances during his tenure, and his continued presence means that pro-Trump factions remain a minority on the board. This objectively provides Walsh with a political buffer—attributing any policies that displease the president to collective board decisions. Walsh himself has described the current operations of the Federal Reserve as a "family internal debate."

Rising Yields: Pressure and Tool for Walsh

The rise in Treasury yields poses a tricky problem for Basent—he needs to issue over $10 trillion in U.S. debt over the next year, creating immense pressure. Last week's $6 billion buyback effort was unsuccessful, further highlighting his difficult position.

However, Gavekal Research noted in a client report this week that, "Unlike Basent, Walsh does not seem troubled by rising yields." The reason is that higher yields themselves help suppress inflation, tightening financial conditions without the need for rate hikes, which corroborates Walsh's assertion at Jackson Hole that "the era of long stagnation has ended."

Meanwhile, the Federal Reserve is currently reducing its long-term Treasury holdings by approximately $19 billion per month, exceeding the scale of Basent's buyback plan. Gavekal specifically pointed out that Walsh has commissioned an external committee to propose recommendations on balance sheet policy, with a report due by the end of the year, providing him with another tool for tightening financial conditions.

The Link of Druckenmiller: Walsh and Basent Will Not Have a Direct Break

The policy differences between Walsh and Basent have raised market concerns about a public "collision" between the two. Recently, Stanley Druckenmiller published a column in the Wall Street Journal urging Basent to "let the bond market speak" and stop intervening, further reinforcing this narrative.

However, a key link is often overlooked: both Walsh and Basent come from Druckenmiller's mentorship. They have supported each other in securing their current positions and share a common ideological background in responding to the financial crisis. Analysts believe that regardless of how much divergence exists in their policy rhythms, they will work together to prevent systemic financial risks. As Basent faces setbacks in managing the bond market, Walsh's relative strength is highlighted.

Trump's Poll Numbers Under Pressure, Political Intervention Space Narrows

Trump's political situation is also quietly changing. Polls show that American voters' dissatisfaction with Trump continues to rise, partly due to his Iran war policy. To boost Republican support in the midterm elections in November, Trump proposed that if the Republicans win, every adult citizen would receive a $5,000 dividend, a move criticized by some as a signal of "Trump's peak," although it is still too early to make that judgment.

Meanwhile, investors' sensitivity to Trump's policy statements has noticeably decreased—after Basent announced the bond buyback, yields rose instead of falling, which is evidence of this "desensitization" effect, objectively granting Walsh greater space for independent expression.

Democratic Senator Elizabeth Warren labeled Walsh as Trump's "yes man" this spring, asserting that his credibility had been completely lost. However, based on current trends, this "yes man" is now biting back. The real test ahead will be whether Walsh can maintain this hard-won independence if rising yields trigger pressure for quantitative easing.