August 4, 2026
Letter to the Secretary
Dear Mr. Secretary,
Since the TBAC last met in early May, the Iran conflict and its effect on energy prices have remained the dominant influence on global markets. After Brent crude peaked near $126 during the spring, a fragile ceasefire and de-escalation pushed prices lower through June, with Brent easing to the low-$70s. Tensions reignited in July, pushing oil higher, though prices remain well below the spring peak. Shipping through the Strait of Hormuz has stayed below pre-conflict levels, leaving oil sensitive to headlines.
Energy market volatility and a firming of conditions have influenced rates markets significantly. Ten-year Treasury yields have risen to roughly 4.6%, and two-year yields have risen to around 4.2% -- well above the 3.50%-3.75% target range for the Fed Funds rate -- as market participants have shifted from pricing rate cuts to assigning substantial probability to one or more rate increases. That repricing came amid continued strong economic statistics and the dropping of FOMC forward guidance that had signaled a tilt toward future rate cuts in favor of an unambiguous commitment to price stability. The FOMC’s Summary of Economic Projections turned notably more hawkish in June: the median 2026 policy-rate projection moved up, roughly half of participants who submitted projections penciled in at least one hike this year, the core PCE projection for 2026 was revised up to about 3.3%, and the real growth projection was revised down to about 2.2%.
U.S. risk assets have held up despite higher yields: equities have traded near record highs, with the S&P 500 up modestly since the Committee last met, led by technology and the AI investment cycle, although a late-July wobble in semiconductor stocks reversed part of the year’s gains. Implied volatility has stayed low, with the VIX near 16, and gold has fallen from its late-January highs of around $5400 to around $4100 per ounce. In a reversal of last year’s trend, the dollar rallied modestly in 2026. The broad dollar index is up roughly 1.5% year to date, as the shift in the Federal Reserve’s expected path from cuts toward possible hikes outpaced the repricing of other major central banks, before easing in mid-July on softer inflation data.
Real activity has continued to expand at a solid pace. Following first-quarter real GDP growth of 2.1% annualized, the Q2 advance estimate slowed modestly to 1.5%. Investment related to artificial intelligence has remained a major contributor to growth, reflecting demand for compute that continues to outpace supply. Consumer spending has stayed resilient, despite negative real income growth, supported by the wealth effect and by elevated tax refunds that allowed households to draw down saving.
The labor market has continued to exhibit a broad balance between supply and demand. Nonfarm payroll gains averaged roughly 110,000 per month over the second quarter (after April and May were both revised lower), and while the June print of 57,000 was soft, the year-over-year pace remains broadly stable. The unemployment rate ticked down to 4.2% in June from 4.3%, with a slowdown in immigration having lowered the breakeven pace of job creation needed to hold the rate steady. Wage growth has remained muted, with average hourly earnings standing at around 3.5% year over year, consistent with a labor market in broad balance that is not a meaningful source of inflationary pressure.
Headline inflation swung sharply with energy prices over the quarter, but second-round effects on core have so far remained limited. Headline measures accelerated to multi-year highs in late spring, before June data came in notably softer, bringing the annual rate of headline CPI to 3.5% and core CPI to 2.6%. The June softness was broad-based rather than confined to energy-sensitive categories. Core PCE has continued to run well above core CPI, with the latest annual print coming in at 3.3%, reflecting differences in weighting and methodology rather than a broad reacceleration in prices. Cleaner underlying gauges, such as the Federal Reserve Bank of New York's Multivariate Core Trend measure, put underlying core PCE closer to 2.5%. AI-related input costs have pushed the other way, with memory prices up roughly 300% year over year and beginning to feed into consumer goods. While inflation remains above the Federal Reserve's 2% target, longer-term inflation expectations have remained contained, with survey measures declining recently.
Against that backdrop, the Committee convened for its quarterly refunding discussion. The outlook for the remainder of FY26 suggests Treasury remains adequately funded, although the funding gap begins to widen in FY27 and increases further in FY28. Consistent with Treasury’s cash management policy, the Treasury General Account (TGA) is expected to end Q4 FY26 and Q1 FY27 at approximately $950 billion and $850 billion, respectively. The Committee noted that the Q1 FY27 estimate may be lower because December 31 falls on a Thursday before a holiday weekend, and recommended that Treasury consider providing additional context on future TGA estimates to support clearer market understanding.
The Committee next addressed the first of its two charges: Treasury market transparency. Members discussed incremental steps Treasury could take to provide additional transparency into secondary market transactions. The presenter highlighted several market developments since the last proposal, including meaningful growth in the Treasury market, implementation of central clearing, Treasury’s buyback program, and the continued rise of electronic trading. These developments have helped reduce average transaction costs and improve market resilience, but important differences remain between on-the-run (OTR) and off-the-run (OFR) markets. The Committee considered targeted enhancements designed to preserve market functioning and anonymity while expanding coverage of in-scope transactions and broadening market participation.
Committee members acknowledged the helpfulness of market transparency initiatives. Meaningful discussion surrounded mitigants such as delayed dissemination, broader bucketing, and aggregate statistics relative to transaction-level reporting. The Committee generally agreed that enhanced aggregate and transaction-level dissemination for T-bills, as well as near real-time transaction-level disclosure for OTRs, would benefit markets. Members also discussed the merits and risks of transparency for the cheapest-to-deliver (CTD) security for Treasury futures, including participant anonymity and dealer intermediation. They ultimately agreed that distinguishing those transactions would likely be operationally complex and difficult to implement. The Committee also noted that increasing dissemination for OFR securities could have mixed effects, even with a significant delay, because the information could reveal the activity of systematic trading programs, particularly for passive and index-tracking investors with regular and predictable trading needs. Finally, members observed that the increasing use of AI makes data mining easier and faster, heightening the risk of compromising anonymity.
The Committee identified purely foreign transactions as one gap in current data collection. Because foreign-to-foreign transactions (assuming neither counterparty is a FINRA member) are not currently reported to TRACE, the Committee recommended that Treasury consider coordination with other major jurisdictions on trade activity reporting to improve the completeness of the data collected. The Committee did not propose any separate dissemination of transactions involving foreign entities.
The Committee then turned to its second charge: intraday repo. Members discussed the current landscape, including its interactions with money markets, collateral arrangements, and the Treasury market. Today, most acute intraday funding needs arise from timing mismatches rather than persistent funding shortages, with the main liquidity pinch points occurring between 8 a.m. and 10 a.m. and generally lasting less than 30 minutes. As transaction sizes have increased, however, these timing mismatches have created larger intraday funding demands, suggesting that a more robust intraday repo market could help address temporary liquidity shortfalls during periods of concentrated settlement activity.
While intraday repo could be a useful tool for addressing very short-term liquidity needs in funding markets, it is not widely adopted today, with demand currently managed largely through bank daylight credit. Growth in digital assets and a likely migration toward 24-by-7 market access may create greater demand for intraday repo or other customized increments beyond the traditional overnight tenor. The Committee also noted that, if markets move toward a materially different trading cadence, benchmark rate calculations such as SOFR may need to be reassessed.
Since the global financial crisis, banks have maintained larger liquidity buffers in response to liquidity rules and supervision, reducing their reliance on central bank intraday credit. The Committee discussed potential evolutions in the liquidity regulation and supervision framework, including efforts to normalize the use of central bank daylight overdrafts and possible discount window monetization. Greater use of daylight overdrafts could strengthen payment system resilience and facilitate larger transactions throughout the business day.
On issuance, the Committee recommended keeping nominal coupon, FRN, and TIPS auction sizes unchanged. The Committee continues to believe that current projections could warrant increases in coupon issuance in FY27. Given the projected funding gaps in FY27 and FY28, members recommended that Treasury consider updating its forward-guidance language to preserve flexibility heading into FY27. As always, the Committee emphasized that clear communication and a regular, predictable operating framework would help market participants adjust to any future changes.
In conclusion, I would like to thank both Chris Leonard and Lew Alexander for their service on the Committee and for the valuable insights they contributed during their tenure. I would also like to welcome Mike Stanley to the Committee, and know that he will make many valuable contributions. It is a true honor to assume the role of Chair, and I look forward to working with Alex, my Committee colleagues, and the team at Treasury.
Respectfully,
Jason S. Granet
Chair, Treasury Borrowing Advisory Committee
E. Alexander Schiller
Vice Chair, Treasury Borrowing Advisory Committee