Current U.S. capital markets remain plagued by numerous anxieties, primarily centered on surging long-term government borrowing rates, with the difficulty of rescuing this crisis far exceeding that of stabilizing the volatile stock market. Typically, tightening monetary and fiscal policies serve as solutions to combat rising inflation and elevated government debt, but this current "prescription" may also suppress U.S. economic growth and potentially worsen tax revenue issues. Market analyst Mike Dolan believes the current situation requires "deft policy responses" rather than "monetary easing."

For decades, equity investors have discussed the Federal Reserve "Put" (Central Bank Put), an options market term referring to the Fed's policy safety net constructed through interest rate cuts to stimulate the economy and inject liquidity, thereby limiting significant stock market declines. During the 1990s, under former Fed Chairman Alan Greenspan's tenure, the concept of the "Fed Put" became widespread, with its actual effects largely meeting expectations. Authorities consistently found reasonable justifications for accommodative policies: either to suppress excessive market volatility and corporate operational uncertainty, or based on the belief that "negative wealth effects" (stock market declines leading to reduced household wealth and consumption willingness) could damage the overall economy.

At the time, many economists and market observers worried that expectations of "Fed backing" would encourage excessive risk-taking behavior. This concern essentially became reality before the 2007-2008 banking crisis and global economic recession erupted. However, the Fed's subsequent response to that credit crisis, involving balance sheet expansion and money printing measures over a decade-long period, revived the notion of "policy put existence."

Over the past decade, including during the COVID-19 pandemic, these measures not only made Wall Street "virtually risk-free" in essence, distorting normal market logic, but also enabled the U.S. government (along with many other national governments) to accumulate more debt, particularly as the Fed continuously purchased large quantities of government bonds, "taking over" government debt.

Observing this year's performance, especially this week's long-term government bond performance, reveals that markets seem to have "raised red flags" regarding this debt expansion model. If so, perhaps it's time to activate the "Fed Put" to ensure controllable debt and government solvency capability. However, the timing remains premature and far from straightforward.

**The "Put" Is Not Omnipotent**

Dolan notes that rising debt is only part of the problem. If this were the sole issue, lowering policy rates might suffice to solve the mathematical puzzle of debt sustainability. The real concern is that, unlike most of the past two decades, the current situation may present a "crisis" that the Fed cannot easily resolve: U.S. inflation remains well above target levels, and many believe the Fed's inflation-fighting capability is being undermined by the Donald Trump administration's "political manipulation" of the Fed.

With current U.S. economic growth exceeding 3%, abundant credit, and financial conditions at their most accommodative in years, if the Fed still follows Trump's demands to initiate large-scale easing policies, bond markets may be forced to price in expectations of "future long-term inflation well above 2%." Current market baseline expectations appear to anticipate average inflation rates reaching 2.5% over the next decade.

At minimum, this inflation uncertainty will drive up risk premiums in U.S. debt markets. Considering the extremely low probability of fiscal tightening in the foreseeable future, this means that even if the Fed cuts rates, long-term Treasury yields could actually rise. The "put" that equity investors rely on proves ineffective for long-term bonds, at least under current circumstances.

Meanwhile, Dolan believes the potential impact of rate cuts on long-term debt markets has become quite clear: as market expectations for Fed rate cuts have intensified, the U.S. Treasury yield curve has experienced its steepest climb in nearly a decade (with long-term yields rising far more than short-term yields).

Furthermore, despite multiple European central banks initiating rate cuts this year while the Fed has yet to act, these measures have not prevented European long-term nominal borrowing rates from reaching ten-year highs this week. In fact, Europe's yield curve is now much steeper than America's, while U.S. inflation concerns should theoretically be more severe.

There have been persistent rumors that resolving this contradiction could involve dual measures: pressuring the Fed to cut rates while having the U.S. Treasury adjust the maturity structure of massive government debt, relying more heavily on short-term bonds (which benefit most from benchmark rate reductions) while reducing long-term bond issuance (whose yields may rise due to inflation concerns).

This "Twist Operation" could become a new and far more complex "government put," but implementation would require carefully orchestrated steps and cautious execution to prevent cyclical market collapse. Even if this operation succeeds, it cannot alleviate markets' core concern: inflation may be unable to return sustainably to target levels throughout the investment cycle.

As risk premiums continue climbing, this concern may persistently exert upward pressure on long-term Treasury yields. For long-term bond markets, such "puts" appear riddled with holes and unlikely to succeed.