The Trump administration is strategically focusing on maintaining lower Treasury yields rather than advocating for Federal Reserve interest rate cuts. Since Donald Trump took office, the 10-year Treasury yield has mostly declined. On Wednesday, it dropped about 10 basis points, or 0.1 percentage point, reaching a trading level of 4.45%, down from its mid-January peak of 4.8%. Treasury Secretary Scott Bessent emphasized that the administration is leveraging fiscal policy tools to keep these rates low, which aligns with President Trump's agreement with the Federal Reserve's recent decision to maintain the federal funds rate.
Bessent stated that the administration's priority is on the 10-year Treasury yield rather than the central bank's federal funds rate. This strategic focus aims to support economic stability by preventing the yield from exceeding critical thresholds.
"He wants lower rates. He is not calling for the Fed to lower rates," – Bessent
The administration's stance marks a shift from Trump's first term, where he frequently urged the Fed to cut rates. Now, the focus is on using fiscal measures to ensure low Treasury yields, thus minimizing tension with the Fed. This approach could be favorable for markets, as it eases potential friction between government fiscal policies and central bank monetary strategies.
Additionally, the Trump administration aims to make the Tax Cuts and Jobs Act permanent and concentrate on energy exploration and deficit reduction efforts. These initiatives are integral to their broader economic strategy, which seeks to engender a favorable interest rate environment through efficient government operations and reduced expenditure.
"We cut the spending, we cut the size of government, we get more efficiency in government, and we're going to go into a good interest rate cycle," – Bessent
Despite the Fed's recent rate-cutting cycle, which decreased the funds rate by a full percentage point starting in September 2024, Treasury yields have paradoxically increased. Market indicators of inflation expectations have risen in tandem. This dynamic underscores the administration's belief that managing Treasury yields effectively is crucial for sustaining economic growth.
Krishna Guha highlighted that maintaining yields below a certain threshold is vital for the success of Trump’s economic policies.
"is consistent with our view that he has essentially one job – to try to prevent the 10y yield from breaking 5 percent at which point we think Trumponomics breaks down, with equities rolling over and housing and other rate-sensitive sectors breaking lower," – Krishna Guha