U.S. Federal Reserve target face challenge: Trump aims to increase long-term interest rates
Finance Minister Scott Bessent is aiming to boost sales of short-term bonds while maintaining the volume of long-term sales stable, with a focus on keeping mortgage rates low. This strategy is in response to the current economic climate, where the government, with a national debt of $37.4 trillion and an expected deficit of over 6% of GDP, seeks to lower financing costs but finds fiscal solutions elusive.
Meanwhile, Donald Trump's nominee for the Federal Reserve, Stephen Miran, has proposed a third mandate for the central bank, aiming for 'moderate long-term interest rates.' If implemented, this would give the Federal Reserve a stronger influence on long-term interest rates. However, the ambiguity of the term 'moderate long-term interest rates' has raised concerns among market observers, as it could potentially be used to justify various interventions.
The suggestion by Miran has caused a stir, implying potential government intervention in long-term interest rates. Some investors are contemplating the possibility of unconventional interventions if the third mandate is implemented. These interventions could range from increased sales of short-term bills to bond buybacks to renewed Fed purchases under QE.
The yield on US 10-year Treasury notes reached a peak of 4.8% in January this year but has since retreated to 4.02%. Historically, it remains below the average of 5.8% since the 1960s. The Fed has previously implemented similar programs during wars, economic crises, and the financial crisis and pandemic.
However, some argue that the current economy is robust and the stock markets are at all-time highs, unlike during past interventions. Economics professor and Fed historian, Gary Richardson, shares this view. He suggests that the Fed will ultimately have to do what the President and financial authorities want, whether it's higher inflation or not.
The weaker labor market, expecting further rate cuts, has recently led to a decline in long-term US Treasury yields. These yields significantly influence the costs of mortgages and corporate loans. Lisa Hornby, head of US Fixed Income at Schroders, believes the government seeks to boost the housing market with this intervention.
Investors are taking precautions against the risk of the Fed losing its independence due to potential politicization. Mark Spindel, Chief Investment Officer at Potomac River Capital, is buying short-term inflation-protected Treasury securities (TIPS) as a hedge. Trump is putting significant pressure on the Fed and its chairman, Jerome Powell, and is now calling for a large 50 basis point rate cut in the current rate decision.
The debate over interest rates and the role of the Federal Reserve continues, with various opinions and strategies being proposed. The outcome will undoubtedly have significant implications for the economy and financial markets.
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