This article from Bloomberg has sparked widespread discussion in the English-speaking community, especially regarding where the Federal Reserve and the Treasury Department's agreement will ultimately land. What exactly is the market worried about? Here are my thoughts:

1. The core idea of the article is that Waller hopes to reform the relationship between the two agencies through a new version of the Fed-Treasury agreement, essentially reshaping the 1951 agreement. The 1951 agreement's core is that it established the Fed's independence by preventing it from restricting yields to lower government borrowing costs. Waller believes that the Fed's massive liquidity injections during the pandemic effectively violated this agreement, leading to an uncontrollable expansion of government debt. Therefore, he advocates renegotiating a new agreement to define the size of the Fed's balance sheet and coordinate with the Treasury's debt issuance plans.

2. The article presents several possible scenarios:
- Scenario One: A simplified version, where both parties agree that QE (long-term bond purchases) can only be conducted in limited emergency situations, with Treasury needing to provide backing or confirmation.
- Scenario Two: A formal version, involving restructuring the Fed's balance sheet, shortening the duration of holdings, and shifting toward holding short-term government bonds.
- Scenario Three: An aggressive approach, where the Fed swaps its MBS for Treasury bonds with the Treasury, or even reduces mortgage costs through Fannie Mae.

3. Market concerns: If such an agreement is implemented, although it could quickly lower interest rates in the short term, it essentially amounts to a shadow version of YCC (Yield Curve Control). This would not only further undermine the Fed's independence but also likely lead to runaway inflation, weaken the dollar's attractiveness, and diminish the status of U.S. Treasuries.

4. What are the possible realities?
- Before Waller took office, I believed that the current situation in the U.S., being hostage to fiscal deficits, couldn't be solved simply by changing the Fed chair. Especially considering the current scale, Waller's capacity to shrink the balance sheet is extremely limited. Under this context, large-scale balance sheet reduction isn't feasible, so shortening the duration of Fed holdings becomes an inevitable option. This would lead to a decrease in both long-term bond supply and demand.
- An important feature of the coming fiscal era is that Fed bond purchases will become a rigid action, especially as foreign investors' bond holdings continue to shrink (notably foreign central banks). Therefore, ample reserves or continuous money printing to banks to absorb debt is currently the only solution.
- We also need to consider Japan's current crisis. It cannot be assumed that Japan's surrender faction will allow the bond market to spiral out of control just for the U.S. If Japan begins selling U.S. Treasuries, the extreme risk would be enormous.
- High nominal growth and high debt levels must be matched with high liquidity. Printing money is always the least resistance solution. From a practical perspective, it remains the only viable option, though recreating pandemic QE is nearly impossible now.
- Moderate inflation or an even steeper inflation curve than before is unavoidable. The rise in gold, silver, and other resource-based assets isn't just market speculation; it's because fiat currency is increasing, making scarce resources more expensive.
- A potential consequence is that even without explicit YCC, term premiums will become more sensitive, the repo market's importance will surpass that of the Powell era, and market volatility will increase.