Rumors circulating in the market suggest that Federal Reserve Chair Powell deliberately used his press conference to push up long-term Treasury yields in order to tighten financial conditions. Bank of America Securities has clearly rejected this theory, arguing that the logic does not align with the Fed's operational framework and would be unlikely to gain support from the Federal Open Market Committee (FOMC).
According to market sources, Bank of America Securities noted in a rate research report published on August 7th that long-end Treasury yields rose significantly after the July FOMC meeting, accompanied by a widening of breakeven inflation rates. Some clients inferred from this that Powell's actions were intentional, theorizing that he needed to raise long-term interest rates to curb inflation, counteract loose financial conditions, and rein in an investment boom, with the press conference serving as his carefully designed tool.
Rate strategist Mark Cabana and economist Aditya Bhave from Bank of America Securities directly refuted this assessment in their report, stating that other FOMC members would also not accept such a narrative. The recent steepening of long-end yields and the widening of inflation expectations serve as a reminder to the FOMC of the risks associated with operating beyond its direct control.
Federal Reserve Policy Framework: The Federal Funds Rate Remains the Core Tool
The report cited the FOMC's "Statement on Longer-Run Goals and Monetary Policy Strategy," which explicitly lists "adjusting the target range for the federal funds rate" as the primary means for the FOMC to adjust its monetary policy stance. Only when the federal funds rate is constrained by the effective lower bound would broader tools be deployed. The statement makes no mention of long-term Treasury yields. Initially effective in January 2012, the statement was reaffirmed in January 2026.
The report emphasized that Powell cannot unilaterally change the Fed's approach to policy implementation. If he intends to shift the operational framework, he would need the full support of the FOMC, a threshold that is not easily met.
Long-Term Interest Rates: Limited Control and Significant Risks
The report further analyzed from an operational perspective why the Fed remains committed to the overnight interest rate tool.
It noted that the Fed has direct and precise control over the overnight rate, which can be flexibly adjusted through administered rates and reserve management. The Fed has extensive experience with this tool, and interest rate fluctuations are relatively manageable. The limitation is that transmission to long-term rates relies on market expectations of the future policy path, which the Fed can only influence indirectly through communication and forward guidance.
In contrast, the Fed's direct influence over long-term rates is extremely limited, except through large-scale asset purchase programs (LSAPs). Any other impact on long-term rates is indirect, primarily transmitted through policy expectations or the term premium channel. The report specifically noted that the term premium is difficult to manage precisely and carries a risk of overshooting, which could lead to significant volatility if it becomes unmoored.
FOMC Unlikely to Abandon Controllable Tools
The recent sharp rise in long-end yields itself serves as a warning signal, making the FOMC acutely aware of the potential costs of operating outside its direct control. The report concluded that the FOMC is unlikely to embrace such untested and poorly validated policy tools.
Bank of America Securities' final conclusion is clear and concise: Powell cannot unilaterally alter the FOMC's operational practices, and the FOMC will likely continue to use the overnight rate as its core policy tool. The so-called "four-dimensional chess" theory of manipulating long-term rates is merely an overinterpretation by the market.
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