The US Treasury’s focus on long-term bond yields may be diverting attention away from the Federal Reserve (Fed) and towards President Donald Trump’s economic plans. This shift in emphasis, led by Treasury Secretary Scott Bessent, could have implications for the Fed’s ability to set interest rates.
Yields on 10-year Treasury notes have risen more than three-quarters of a percentage point despite the Fed’s recent cut in short-term interest rates. Market experts attribute this divergence to various factors, including high US government deficits and above-target inflation. However, the Trump administration seems less concerned with these issues, focusing instead on the yield on the 10-year Treasury.
In comments on Fox Business, Bessent clarified that when Trump refers to lower interest rates, he is actually talking about the 10-year Treasury yield, not the short-term rate set by the Fed. This distinction highlights the growing sensitivity of market constraints that could impede Trump’s economic plans.
Market expert Krishna Guha suggests that deregulation and debt management may have contributed to the recent decline in yields. However, maintaining this focus will be crucial, given its implications for Trump’s “Trumponomics” policies.
The current 10-year rate remains above what it cost to finance the government during Trump’s first term and is also higher than the annual US economic growth rate. The Fed’s response to this divergence raises questions about the effectiveness of monetary policy in influencing broader economic conditions.
Bessent emphasizes that the president wants lower interest rates, but believes that deregulation and tax reform will drive market changes on their own. Trump recently expressed support for the Fed holding interest rates steady, suggesting a shift in his approach to addressing economic concerns.
Ultimately, the focus on 10-year Treasury yields highlights the complexity of monetary policy and its limitations in shaping long-term borrowing costs. The Trump administration’s emphasis on this aspect may be an attempt to sidestep Fed scrutiny and promote its own economic agenda.
Source: https://www.reuters.com/markets/us/bessents-focus-10-year-us-treasury-yield-may-let-fed-off-hook-2025-02-06