Treasury and Fed are at odds

Scott Bessent is aggressively buying back long-term debt while the Fed considers raising rates. The two institutions are pulling in opposite directions on the yield curve.

“I am the house now, Treasury Secretary Scott Bessent told traders last week.”

Multiple signs of economic heat

Oil hovers near $110 a barrel, 10-year Treasury yields exceed 5%, AI-related debt issuance hit $308 billion through July, and national debt crossed $40 trillion. Inflation remains above 3%.

The overheating case is strong

Nominal GDP grew 6% to 6.5% in early 2025, well above the 4% equilibrium. A budget deficit at 6% of GDP, massive AI investment, and delayed rate cuts are all hitting at once, says Jon Hilsenrath.

“It sure does look like the economy is overheating.”

Goldman Sachs sees no overheating

Goldman's Bottlenecks Tracker shows factory constraints and labor shortages are actually less widespread than before the pandemic. Most inflation comes from tariffs and supply shocks that rate hikes won't fix.

“The economy is not overheated, which is the usual rationale for raising rates.”

Oil disruptions could be temporary

Oil prices might be a fleeting supply shock that fades without Fed intervention, or a persistent problem that embeds itself in inflation expectations. The answer determines whether the Fed needs to act.

AI boom cuts both ways

Hundreds of billions in data-center investment could unlock productivity gains that justify higher growth. But in the short term, it's a massive demand shock financed through credit markets.

The core question for Warsh

Is inflation from an unusual pileup of supply shocks, or from aggregate demand running too fast? The answer determines whether one rate hike is enough or if a new tightening cycle begins.