Yield Curve Control and the Conclusion of the Treasury Inversion

It has become increasingly clear that Treasury Secretary Scott Bessent favored Kevin Warsh for the role. Warsh has advocated for tighter coordination between the Federal Reserve and the Treasury Department, particularly in managing the yield curve and conducting open market operations. The Treasury yield curve is currently at its steepest level in four years, suggesting that Bessent has been effective in resolving the inversion that occurred under his predecessor, Janet Yellen. If Warsh is confirmed as the next Fed Chair, Bessent’s influence is likely to grow further—an important factor if the Fed aims to reduce interest rates.

According to the Financial Times, some economists question Warsh’s belief that artificial intelligence will have a deflationary effect. Warsh argues that AI will spark “the most productivity-enhancing wave of our lifetimes—past, present and future,” boosting output and allowing the Fed to lower key rates without fueling inflation. Such remarks are expected to draw significant attention during his Senate confirmation hearing.

On Tuesday, the Commerce Department reported that retail sales were flat in December. However, November’s figures were revised upward to a 0.6% increase, up from the previously reported 0.3%. Economists had anticipated a 0.4% rise in December, making the latest data disappointing. Because of the federal government shutdown, the report was released a month late, and the substantial upward revision to November’s data has somewhat diminished the report’s impact. Following the release, Treasury yields fell, increasing the likelihood of another Fed rate cut.

Meanwhile, after a month-long pursuit, the U.S. Navy seized its eighth Venezuelan crude oil tanker in the Indian Ocean. The vessel, Aquila II, had attempted to bypass the U.S. blockade. The Navy’s intensified crackdown on so-called “shadow tankers” is expected to worry countries like Iran and Russia, which have also relied on similar methods to transport oil despite sanctions.

In diplomatic developments, U.S. and Iranian officials met in Oman to discuss dismantling Iran’s nuclear program. Washington is pressing Tehran to halt uranium enrichment, limit its ballistic missile program, and end support for regional proxy groups. Iran, however, has stated it is only willing to negotiate over its nuclear activities. If talks collapse, the U.S. could carry out another military strike, which explains its significant naval buildup in the region. Notably, Iran seized two oil tankers before the negotiations but later described the discussions as “positive.”

Sources: Louis Navellier