Wall Street “Conspiracy Theory”: Did The Fed Intentionally Boost Long-Term Treasury Yields?

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The market widely speculates that Fed Chair Powell deliberately used the press conference to boost long-term Treasury yields in order to tighten financial conditions, but Bank of America Securities has directly refuted this.

Original Article Title: "Wall Street 'Conspiracy Theory': Did Powell Deliberately Push Up Long-Term Treasury Yields?"

There has been a market rumor that Federal Reserve Chairman Powell intentionally raised long-term Treasury yields through a press conference to tighten financial conditions. Bank of America Securities explicitly disagreed with this theory, pointing out that it not only contradicts the Fed's operational framework but also lacks support from the FOMC.

According to Windseeker Trading Desk, Bank of America Securities mentioned in a rate research report released on August 7 that after the July FOMC meeting, long-term Treasury yields experienced a significant increase, leading to a widening of the inflation breakeven rate. Some clients inferred that this was deliberate on Powell's part—their logic being that to curb inflation, counter loose financial conditions and speculative investment fervor, Powell needed to raise long-term rates, with the press conference being his carefully designed tool.

Bank of America Securities' rate strategist Mark Cabana and economist Aditya Bhave directly refuted this assessment in the report, believing that other FOMC members would also not endorse it. The sharp rise in long-term rates and the broadening of inflation expectations last week served as a reminder of the risks FOMC faces when operating outside its direct control range.

Fed Policy Framework: Federal Funds Rate Is the Core Tool

The report cited the FOMC's "Statement on Longer-Run Goals and Monetary Policy Strategy," which explicitly lists "adjustments to the federal funds rate target range" as the FOMC's primary tool for adjusting monetary policy stance, with broader tools only being used when the federal funds rate is constrained at the effective lower bound. The statement does not mention long-term Treasury yields at all. The statement initially took effect in January 2012 and was reaffirmed in January 2026.

The report emphasized that Powell does not have the authority to unilaterally change the Fed's policy implementation. If he intends to drive a shift in the operational framework, he must obtain overall FOMC support, a threshold that is not low.

Long-Term Rates: Limited Control, Hard-to-Manage Risks

The report further analyzed from an operational perspective why the Fed adheres to the overnight rate tool.

It pointed out that the Fed has direct and precise control over the overnight rate, with the ability to flexibly adjust rates and reserve flows through management and repo operations. With rich historical operational experience, rate fluctuations are relatively controllable. The limitation lies in the transmission to long-term rates relying on market expectations of future policy paths, with the Fed only being able to indirectly influence them through communication and forward guidance.

In contrast, the Fed has very limited direct influence on long-term interest rates—unless it resorts to large-scale asset purchase programs (LSAPs). Other influences on long-term rates are all indirect, mainly transmitted through policy expectations or the term premium channel. The report particularly points out that the term premium is difficult to control precisely, posing risks of overreaction. Once out of control, the volatility could be significant.

FOMC Will Not Easily Abandon Controllable Tools

The sharp rise in long-term rates last week was in itself a warning signal, making the FOMC acutely aware of the potential cost of operating beyond its direct control range. The report concludes that the FOMC is unlikely to be enthusiastic about supporting such policy tools with little experience and inadequate validation.

Bank of America Securities' final conclusion is clear and concise: Powell cannot unilaterally change the FOMC's operational norms, and the FOMC is highly likely to continue using the overnight rate as its core policy tool. The so-called "four-dimensional chess" approach to controlling long-term rates is nothing more than an overinterpretation by the market.