Trump Reverses Position on Interest Rates, Shifts Focus to Treasury Yields
For a while, President Donald Trump has insisted on lower interest rates from the Federal Reserve. But then he had an about-face last week, saying that the central bank’s holding interest rates where they were “at this point was the right thing to do.” Instead, his goal now was to lower yields on the 10-year Treasury.
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That leaves two questions for investors, including those in commercial real estate. One is whether the goal is within the control of the administration. The other is understanding how long this strategy will continue.
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“It’s quite unconventional for the Treasury Department and the White House to take an active role in influencing the 10-year yield. Historically, they’ve worked together with the Fed to do that,” Ryan Detrick, chief market strategist at Carson Group, told CNN. “The administration can only influence yields indirectly with fiscal policy and deregulation.”
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“In my talks with [the president], he and I are focused on the 10-year Treasury [yield],” Treasury Secretary Scott Bessent said in an interview on Fox Business. “The President wants lower interest rates. [He] and I are focused on the 10-year Treasury [yield]. The purpose of lowering interest rates is to lower interest rates.”
He noted that the Fed undertook a “jumbo rate cut, and the 10-year rate went up.” The difference between the two is called the term premium, which had been quickly rising because the bond market has been concerned about the potential of reigniting inflation while adding to the government debt, which in theory drives up the yields investors in Treasurys expect.
Bessent pointed out that 10-year yields have come down somewhat this year. At the opening of January, the yield level was 4.57%; as of last Friday, it was down to 4.49%. He attributes the change to the bond market recognizing that “energy prices will be lower, and we can have non-inflationary growth. We cut the spending, that we cut the size of government, that we get more efficiency in government, and we’re going to go into a good interest rate cycle.”
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Bessent added that Trump assumes “if we deregulate the economy if we get this tax bill done, if we get energy down, then rates will take care of themselves, and the dollar will take care of itself.”
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Energy commodity prices (gasoline and fuel oil), in December 2024, were 3.9% lower than in December 2023. It’s been service prices to transmit electricity and pipe gas were up 2.8% and 4.9% respectively and creating more supply won’t affect them.
“The jury is still out on how much progress we’re going to make on the fiscal side,” Robert Kaplan, vice chairman of Goldman Sachs and a former president of the Dallas Fed, told Reuters. “If we make progress you’ll see some improvement there. I think you’re still more likely to have an upwardly sloping yield curve.”
Extending the tax cuts of 2017 would add $3.3 trillion to the baseline deficit projections according to the Congressional Budget Office. That type of action might not calm bond investors who, as Reuters noted, “remained somewhat unconvinced by Bessent’s comments.” There is still concern over tariffs, even if delayed in the cases of Mexico and Canada, about potential trade wars. China has already taken retaliatory tariff action.
“The bigger issue in the inflation complex is service-sector inflation, and the stickiness of inflation generally in the past number of months,” Padhraic Garvey, regional head of research for the Americas at ING,” told Reuters. “The tariff agenda can only place upward pressure on prices, and, in fact, [is] likely to prove more impactful than the energy price containment plan.”