Key Points
- In a 2025 article, “The Fed’s New ‘Gain of Function’ Monetary Policy,” Treasury Secretary Bessent states the Federal Reserve’s (Fed) foray into Treasury markets is effectively a “gain-of-function monetary policy experiment.”
- If the Fed wants to maintain independence, it should stay within the lanes of “its statutory mandate of maximum employment, stable prices, and moderate long-term interest rates.”
- The other paper is by newly appointed Fed Governor Stephen Miran. He wrote “A User’s Guide to Restructuring the Global Trading System” to explain the financial market consequences of potential significant changes in trade.
- Governor Miran argues that the U.S. dollar has been too strong, creating trade imbalances, and government policy should aim at a weaker dollar, like the U.S. promoted at the Plaza Accord.
Introduction
Given the debates on Fed independence, the logic of tariffs, and the unknown direction of the U.S. dollar, we imagine the need for further blogs to unpack the complex and convoluted relationships between Treasury, the Federal Reserve system, and the White House. But for now, here is the first installment to present important papers published by two important policymakers.
Two Key Papers
There are two key papers that shed light on the shifts taking place inside the D.C. beltway. Both Treasury and the Fed could be at a crossroads.
The first paper was underappreciated in its initial publication. In the article “The Fed’s New ‘Gain-of-Function’ Monetary Policy,” Treasury Secretary Scott Bessent argues that the Federal Reserve’s use of large-scale asset purchases has transformed its policy regime with unpredictable consequences, creating market distortions and compromising the central bank’s independence. Bessent contends that the Fed’s use of quantitative easing demonstrates its interest in working outside of its congressional mandate, and he calls for the central bank to change course as its toolkit has become too complex.
Moreover, the Fed’s foray into the Treasury markets has drawn it into the realm of public debt management, a role traditionally overseen by the Treasury Department. This entanglement between the Fed and the Treasury could be concerning, as it creates the perception that monetary policy is being used to accommodate fiscal needs, rather than being deployed solely to maintain price stability and promote maximum employment.
The other paper is by Stephen Miran entitled “A User’s Guide to Restructuring the Global Trading System,” where he builds the case that U.S. tariffs will ultimately be paid for by the tariffed nation, whose real purchasing power and wealth decline, and that the revenue raised (in the U.S.) improves burden sharing for reserve asset provision. So far, we have not seen significant pass-through to consumers according to the latest inflation metrics. However, in the short run, consumers will indeed feel the impact, and it’s not entirely clear yet that the tariffed nations have picked up the full tab. One aspect that is not in the analysis is the inherent vulnerabilities in global trade. Looking back during the COVID-related supply chain bottlenecks, domestic producers will remember the impact on production when suppliers cannot deliver. Miran argues that tariffs could be implemented in a manner deeply intertwined with national security concerns.
Mar-A-Lago Accord
The “Mar-a-Lago Accord” is considered analogous to the 1985 Plaza Accord because both aim to weaken the U.S. dollar and reduce the nation’s trade deficit by adjusting currency valuation.
The Plaza Accord was a 1985 agreement among the G5 nations — France, West Germany, Japan, the United Kingdom, and the United States — to deliberately depreciate the U.S. dollar against the Japanese yen and German Deutsche Mark. The meeting was held at the Plaza Hotel in New York City on September 22, 1985, from which the accord gets its name.
Both proposals were conceived during a time of high dollar valuation, which made U.S. exports more expensive and imports cheaper, thus hurting American manufacturing. The hit over a twenty-year high in October 2022 after global investors flocked to the safety of the world’s reserve currency, and herein lies the Triffin Paradox, named after a Belgian economist. The core paradox is that to provide the global economy with enough liquidity (in dollars) to function smoothly, the issuing country — the United States — must run persistent balance-of-payments and trade deficits.
A key difference is in the proposed approach to achieve the dollar’s devaluation. The Plaza Accord was a multilateral agreement with major trading partners to cooperatively intervene in currency markets. In contrast, the Mar-a-Lago Accord is proposed to rely on leveraging U.S. security commitments and possibly unilateral, coercive financial measures like taxes on foreign Treasury holdings to force compliance from other nations. This reflects a shift from the cooperative diplomacy of the 1980s to a more assertive, transactional, and potentially riskier strategy for managing the dollar.
Moving Away from the Theoretical
The two papers highlighted above are theoretical, and I want to end on a practical note taken from yesterday’s Biege Book published by the Fed. And no, the current government shutdown does not impact Fed publications and activities.
The recent publication covers the period of late August and September 2025, so this will not give us insights into business responses during the shutdown. That said, bifurcated business activity was roughly the same as earlier in the summer: firms saw strong demand for luxury discretionary spending from wealthy consumers and bargain shopping from lower- and middle-income households. Our take is that market segmentation is key to running a savvy business. Business demand for labor was weak across sectors, and those doing the hiring favored temporary and part-time workers over offering full-time opportunities. We expect the job market to slow further.
As expected, some firms facing tariff-induced cost pressures kept their selling prices largely unchanged to preserve market share and in response to push back from price-sensitive clients. Waning demand in some markets reportedly pushed prices down for some materials, such as steel and lumber.
Concluding Remarks and Allocation Implications
The bottom line is firms continue to experience a slowdown in business activity. Despite the uncertainty over tariff-induced , we expect the Fed to continue to in the remaining two meetings of this year. Recession risks still appear well-contained. We continue to monitor changes in the relative attractiveness within sectors, looking for continued notable technical progress and material fundamental changes as third quarter earnings season approaches. We currently hold a modest overweight stance on large caps and an underweight view on small caps, on a tactical time frame. Within sectors, we’re favorable on communication services and financials, but are underweight on materials and utilities.
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Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.