How Trump might lower long-term rates
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A core goal of President Trump's economic policy is to lower long-term interest rates. The administration has policy options to make it happen — both via Econ 101 macroeconomics and some more unconventional means.
Why it matters: If the Trump team is able to deliver on its goal, it would mean relief for homebuyers, corporate borrowers and the government itself. That said, many of the factors determining those rates are beyond the ability of even a president to control.
Catch up quick: "As it becomes clear that [the Department of Government Efficiency] is working, you will see the long-term Treasury" yields fall, Elon Musk said on X on Wednesday. All Americans "will benefit from lower interest payments on mortgages, small business debt, credit card and other loans."
- It echoed comments last week from Treasury Secretary Scott Bessent.
- These comments indicate the administration is focused not on jawboning the Fed to lower its short-term rate target, but on longer-term borrowing costs set in the global bond market.
State of play: The most straightforward, textbook way to lower long-term rates is by lowering the budget deficit. If the government can reduce deficits so that it's issuing fewer bonds in the years ahead, it would mean lower rates and less crowding out of other borrowing.
- House Republicans are currently jockeying over the parameters of a budget plan that, in its current form, would extend and expand upon Trump's 2017 Tax Cuts and Jobs Act while also cutting spending, for a net $3.3 trillion in additional deficits over the coming decade.
- "Meaningfully lower budget deficits would be the most effective way to bring long-term yields down but will also be difficult in the context of extending the TCJA and legislating additional tax cuts, even with sizeable spending cuts," wrote strategists at Deutsche Bank in a new note.
Yes, but: The Deutsche Bank team — Matthew Raskin, Matthew Luzzetti and Steven Zeng — also identified several less-conventional options the administration may wish to explore.
Zoom in: One option would involve relaxing bank regulations to exempt Treasury securities from counting toward the supplementary leverage ratio that constrains risk-taking by the biggest banks. It's a move that would incentivize those banks to buy more Treasury bonds.
- Another option is for Trump to use tariffs or other threats to coerce foreign governments into buying more Treasury bonds.
- A more dramatic move (and one that would require legislation) is eliminating federal income taxes on interest from Treasury securities, making them more attractive to individual investors.
The intrigue: The government currently owns 8,200 metric tons of gold, which are recorded on the Fed's balance sheet at the price of gold in 1973, only $11 billion. At today's price, it's actually worth more than $750 billion.
- Changing the accounting convention could create a one-time reduction in the Treasury's needed debt issuance, the Deutsche team wrote, subject to exactly how the Fed manages its balance sheet in response.
- Such a move could have negative ripple effects, however, including introducing unwelcome volatility in the government's finances as gold prices fluctuate.
Reality check: These less-conventional options "involve trade-offs with other policies and goals and are less likely to be less impactful than they might seem at first blush," Raskin, Deutsche Bank's U.S. head of rates research, tells Axios.
