Trump's interest rates policy comes into focus
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Bessent (left) on Fox Business with host Larry Kudlow. Photo: Paul Morigi/Getty Images
When President Trump demanded lower interest rates two weeks ago, it looked like a return to his 2018-vintage Fed jawboning. But his administration's stance on interest rates now looks more subtle.
Why it matters: The new administration seeks to bring long-term interest rates lower, Treasury Secretary Scott Bessent said Wednesday — and Fed rate cuts aren't necessarily the way to achieve that.
- The Fed controls short-term interest rates, but longer-term rates — which determine the federal government's borrowing costs, as well as home mortgages and many corporate borrowing rates — are set in the open market and reflect investors' expectations of how the economy will evolve.
- Bessent's case — which is consistent with Trump's recent rhetoric — is that what the economy needs is not further rate cuts from the Fed, but deregulatory and fiscal policies that improve the economy's supply-side potential.
What they're saying: Appearing Wednesday on Fox Business, Bessent said that the president wants lower rates but that "he and I are focused on the 10-year Treasury and what is the yield of that?" The Fed, he told Larry Kudlow, "did a jumbo rate cut and the 10-year rate went up."
- The president "is not calling for the Fed to lower rates," Bessent added. "He believes ... if we deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves and the dollar will take care of itself."
- "Now, I've seen, this year, despite the growth estimates going up, 10-year [yields] coming down because I believe the bond market is recognizing that ... energy prices will be lower and we can have non-inflationary growth."
- "You know, we cut the spending ... we get more efficiency in government, and we're going to go into a good interest rate cycle."
The intrigue: When the Fed elected not to cut its short-term interest rate target last week, Trump did not attack the central bank for that non-action. Instead, he slammed the Fed for allowing inflation to take off in the first place.
Between the lines: Trump has no compunction about bashing the Fed when it is running monetary policy tighter than he would like, as in 2018. But that is not the current stance of his administration.
- Bessent's observation that longer-term rates have risen since the Fed began its rate-cutting cycle in September is accurate.
- One possible factor is that bond investors believe the Fed eased policy more than was justified by economic conditions, which would imply higher rates and inflation in the years to come.
- It's the inverse of a pattern seen in late 2015 and late 2018, when the Fed raised its policy interest rate but longer-term rates fell, as traders bet that they had made a policy error that risked recession.
Of note: Bessent and other Trump allies previously sharply criticized the Biden administration for shifting the Treasury's debt issuance toward shorter-term securities, which they viewed as a politically motivated shadow monetary stimulus.
- But in the first bond issuance announcement of Trump's term on Wednesday, the Treasury Department stuck with its Biden-era balance of short-term and long-term debt.
- That contributed to a drop in longer-term yields Wednesday.
