Federal Reserve to Focus on Long-Term Interest Rates in Economic Strategy
President Donald Trump's economic advisors aim to reduce Americans' borrowing costs by targeting the 10-Year Treasury Yield (^TNX). This yield is influenced by Wall Street and financial markets rather than by the Federal Reserve in Washington, D.C.
National Economic Council Director Kevin Hassett explained that by monitoring the 10-Year Treasury Yield, policymakers can assess market sentiments towards inflation control. Lower yields indicate confidence in the Fed's ability to manage inflation, thereby easing pressure on the central bank.
Treasury Secretary Scott Bessent outlined the administration's "3-3-3" strategy: reducing the deficit to 3% of GDP, sustaining growth at 3%, and boosting oil production by 3 million barrels per day. Bessent believes these policies will lower inflation and the 10-Year Treasury Yield.
However, influencing the 10-Year Treasury Yield remains challenging as it is subject to a range of factors, including economic growth, inflation, and Treasury supply.
Bond yields typically move inversely to prices, rising when inflation increases as investors demand higher compensation. The 10-Year U.S. Treasury Yield rose from 3.6% to 4.8% in mid-January before stabilizing around 4.5%.
Elon Musk's Department of Government Efficiency (DOGE) aims to reduce government spending and inflationary pressures. Musk anticipates that as DOGE's impact becomes evident, the 10-Year Treasury Yield will decline, benefiting American borrowers.
Wilmer Stith of Wilmington Trust believes that lowering the deficit and reducing the supply of Treasuries through DOGE's initiatives could help decrease the 10-Year Treasury Yield.
Ed Yardeni of Yardeni Research emphasizes the importance of controlling government spending to keep bond yields low and avoid potential resistance from "bond vigilantes" who can drive yields higher to force fiscal action.
The impact of Trump's trade policies on inflation and yields remains uncertain. While tariffs could raise revenue, they may also be inflationary, potentially pushing up borrowing costs.
Lawrence Gillum of LPL Financial suggests that tariffs could initially lower yields due to safe-haven flows, but significant escalation could eventually push yields higher if they prove inflationary.
Matt Luzzetti of Deutsche Bank points to the potential of boosting demand for U.S. Treasuries through tariff negotiations. This approach could also support broader trade goals by appreciating the dollar and reducing U.S. trade deficits.