Not a week goes by without Donald Trump putting pressure on Jerome Powell to lower interest rates. But between the threats to the independence of the Fed and the tax cuts which dig the deficit, the long rates could go up even if the federal reserve softens monetary policy.
This is one of the major objectives of the Trump administration: lowering interest rates. High rates that cost the government “a fortune”, as it often repeats. We can prove him right on this point since the interests of the debt should approach this year the $ 1,000 billion.
The other problem posed by high rates is for the real estate market. Indeed, rates on mortgage loans (Mortgages) follow the evolution of long rates. In their wake, death rates have been clearly raised in recent years. Today, the average rate at 30 years is around 6.5%. This makes access to the property difficult for many American households, and in particular for first-time buyers (those who do not already have good).
Sources : Freddie Mac, Federal Reserve Economic Database
There is therefore a double interest in lowering rates. First reduce pressure on public finances and politically facilitate access to property to the middle classes.
Everyone has their own job
The objective is therefore clearly displayed and there is a rational behind. But do the policies put in place go in the direction of the desired objective?
At this stage, short rates and long rates should be distinguished. Short rates (whose reference is 2 years) depend mainly on Fed and market expectations on the evolution of its guiding rates. Long rates (10 years is the reference here) depend on growth, inflation, and the term endorship. The term bonus is the supplement of remuneration that investors require to have an obligation (at 10 years or more) rather than rolling its position each year.
Long rates therefore react to deficit issues. The more a state of a state, the more doubts about its term there is a capacity to reimburse its creditors. All this results in a higher premium and therefore higher rates.
If we simplify things a little, short rates are monetary policy, long rates are fiscal policy.
Now, Donald Trump does everything to twist his arm at the Fed and ultimately obtain drops in guiding rate. Rate reductions behind which the market ended up tidying up. The 2 year old is around 50 to 60 base points below the levels of the start of the year.
But at the same time, the Congress voted a tax drop plan which will increase the deficit of $ 3,400 billion over 10 years, which obviously is rather likely to push the long rates on the rise (at least ultimately since the 10 years has also dropped but less than the 2 years. Result, the gap between these two deadlines increases (we are talking about the curve (we speak of the curve).
Gap between 10 years and 2 years. Source: Bloomberg
The treasure forced to play short
All this contrasts with the position displayed in February by Scott Bessent: “Him (Trump) and I are focused on the 10 years”. Translation for their role is to take care of the long part, when the Fed must take care of the short part.
A drop in long rates which then had to allow the Treasury to emit more on long maturity. Indeed, Janet Yellen, who held the post of secretary to the Treasury under Joe Biden, had made the decision to issue more Treasuries on the short part; The idea being that the rise in rates was temporary and that the treasure did not want to block high yields over several years.
A strategy criticized at the time, especially by a certain … Scott Bessent. But today, he is forced to continue the strategy of the previous team. The US Treasury said in late July that it would not increase the size of the shows on the long part.
What if history was repeated?
Last year, the Fed started its rate of rate drop in September. Out of the last three meetings of the year, the Federal Reserve has reduced its rates by 100 basic points. But at the same time the 10 years has risen … about 100 base points.
Evolution of Fed Funds (white) and 10 years (blue). Source: Bloomberg
For what ? Because when the Fed started lowering rates, there were fears about growth. But then solid economic statistics and the re -election of Donald Trump raised growth and inflation anticipations.
We could quite imagine a similar scheme in the coming months. A Fed which under the growing influence of Donald Trump lowers rates, but long rates that go back because the independence of the Fed is questioned or because concerns about the deficit are taking over.
