Bernanke becoming a bond vigilante?

Nothing like a declining bond market to wake-up a Fed chairman especially if they are holding a large portfolio. From the FT:

The Fed chief said large deficit-funded actions to fight the crisis – including the Obama administration’s fiscal stimulus – were “necessary and appropriate.” But he said “maintaining the confidence of the financial markets requires that we as a nation begin planning now for the restoration of fiscal balance.”

He said “near term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances.”

So what exactly will the Fed do? They can talk about discipline but this only makes the problem worse if the Treasury does nothing. They could stop buying Treasury debt which would be a good signal to the markets but then leads to further supply related rate increases especially in the mid part of the curve.

This could be a bigger problem than bank regulation.