Federal Reserve Chair Kevin Warsh’s decision not to back another rate increase as inflation picked up has left markets uncertain about his policy stance. Brookings Institution senior fellow Robin Brooks argues that the key question is not whether Warsh is a hawk or a dove, but whether he is trying to contain long-term Treasury yields. With the U.S. debt burden growing, long-term borrowing costs have become a central concern for policymakers and markets.
U.S. federal debt has topped $40 trillion, while debt held by the public is equivalent to 100% of gross domestic product. In the fiscal year ending in September 2026, federal net interest costs exceeded $1 trillion, more than defense spending. Brooks says recent shifts in Fed signals should be viewed in the context of long-term yields and their effect on government borrowing costs, rather than explained by inflation and other economic data alone.
Warsh’s signals resist a hawk-or-dove label
Warsh has previously called inflation a “choice,” suggesting a tough stance on price pressures. In the summer, he advocated looking at alternative inflation measures and said the bond market could help tighten financial conditions. He delivered hawkish remarks at the Jackson Hole conference in August, and the Fed unanimously voted to raise rates in September.
But after inflation rose again, Warsh did not support a further rate increase last week. He offered no explanation for his position or clues about the next decision, prompting markets to read his stance as dovish. Brooks says the apparent contradictions may reflect a focus on long-term yields rather than a swing between hawkish and dovish policies. He also suggests the Fed and Treasury share an implicit goal of keeping borrowing costs stable, while cautioning that this does not show that efforts to do so have been effective.
Treasury Secretary Scott Bessent unexpectedly announced an increase in long-term bond buybacks, a move that briefly pushed yields lower. Brooks also pointed to Bessent’s intervention in foreign-exchange markets to support the yen and discourage Japan from selling its holdings of U.S. Treasuries. Such sales could put upward pressure on Treasury yields.
Debt costs depend on yields and economic growth
Long-term yields are shaped by more than policy actions. Fears that the war with Iran could escalate again have lifted oil prices and yields, while a stronger-than-expected U.S. economy has raised inflation and interest-rate expectations. In the other direction, easing concerns that the artificial-intelligence boom could fade have reduced pressure on yields. Political turmoil and fiscal concerns in France have raised fears of euro-area debt risks spreading, prompting investors to return to U.S. Treasuries as a safe-haven asset. The 10-year Treasury yield has recently fallen back below 5%.
If nominal GDP growth outpaces interest rates, the government is better placed to avoid borrowing costs rising faster than the economy and setting off a debt spiral. But Treasury yields rose sharply and quickly this year, at one point exceeding the Congressional Budget Office’s baseline projection by more than 100 basis points. The CBO’s baseline assumes a 4.3% yield and also assesses scenarios in which yields are 50 and 150 basis points higher.
In the 150-basis-point scenario, net interest costs would rise by $4.9 trillion over the next decade, and debt held by the public would reach 133% of GDP by 2036. Bank of America’s analysis of CBO data estimates that, under this scenario, the effective interest rate on government debt could exceed long-term nominal GDP growth as early as fiscal 2028. That fiscal year begins in October 2027; the analysis assumes a 4% long-term nominal growth rate.
U.S. nominal GDP grew at a 5.6% rate in the third quarter, buoyed by AI investment and high inflation. On October 19, Bank of America said those supports may not prove durable unless AI adoption ultimately delivers significant productivity gains. The bank also described relying on economic growth alone to absorb the rising debt burden as an optimistic assumption. If long-term interest rates remain above nominal growth, debt sustainability will come under greater strain, potentially narrowing the Fed’s room to set monetary policy independently and fight inflation.