Donald Trump’s administration has charted a course that looks past the Federal Reserve, attempting to lower borrowing costs for Americans through influencing a key interest rate that is shaped more by Wall Street rather than the central bank in Washington, D.C. What is the focus? The 10-year Treasury yield
Kevin Hassett, Director of the National Economic Council, recently announced this strategic pivot.
Hassett, in an interview with CBS Face The Nation, stressed the importance of the 10-year Treasury as a market-driven measure of inflation control.
Hassett said that one way to determine whether the markets believe we are getting inflation under control is to look at interest rates over a longer period of time, which are not directly affected by the Fed.
He explained that he would also reduce the pressure on the Federal Reserve by managing inflation.
This approach was first highlighted by Treasury Secretary Scott Bessent a few weeks ago, who revealed that he and President Obama were both closely monitoring the 10-year Treasury.
Bessent clarified Trump “was not calling for the Fed lower rates,” signaling another avenue for easing borrowing cost.
The “3-3-3” plan: a blueprint to economic growth and fiscal discipline
The administration’s policy focuses on policies that stimulate economic growth, increase productivity, and reduce government spending.
Bessent’s “3-3-3” plan aims to reduce the deficit from 6% of GDP to 3% (from current 6%), achieve a sustained growth of 3% and increase oil production by 3,000,000 barrels per day.
James Fishback, CEO at investment firm Azoria believes that these policies have a tangible effect on inflation and 10-year yield.
Fishback wrote, in a research report: “By reining inflation and spurring economic growth, President Trump’s policies will lower borrowing costs and free up capital to make productive investments.”
The natural market reaction is a downward pull in the yield on 10-year Treasury bonds.”
The DOGE Factor: Elon Musk and the role he plays in reducing waste
Elon Musk’s Department of Government Efficiency is a key component of the plan. It aims to identify and eliminate government wasteful expenditures.
Fishback believes that DOGE is instrumental in reducing fiscal pressures which contribute to inflation and higher returns.
“Less wastage means less inflation which is good for borrowers,” Fishback said.
Influencing the yield on a 10-year bond is a complex task.
While the Fed’s short-term interest rates can have some influence, many factors are involved, including economic growth expectations, inflation expectations, as well as the supply of Treasuries.
Inflation and bond yields are inversely related. This means that investors will demand higher yields as they lose value in their investments.
The yield on the 10-year US Treasury note fluctuated, rising from 3,6% to 4,8% by mid-January and then settling at around 4.5%.
Fluctuations continue to be influenced by inflation readings and expectations of Treasury supply, as well as international factors.
Hassett is optimistic despite these challenges.
The 10-year Treasury rate dropped by about 40 basis points in the last two weeks, while we announced our plan for controlling inflation. Just by talking about what we’re going to do, the Americans saved about $40 billion.
Musk has echoed the sentiment, stating that “as soon as it becomes clear” DOGE is “working, you will notice the long-term Treasury bills yields falling.”
He said that this would result in lower interest rates for Americans on credit cards, mortgages and small business loans.
The supply-side approach: lowering deficit
Wilmington Trust bond portfolio director Wilmer Stith thinks that reducing deficits, and therefore the supply of Treasuries is the most powerful tool to lower the 10-year bond yield.
“If DOGE makes a significant impact and Elon and his team are able to start paring billions and millions of dollars down, that would be good for this concern about a larger Treasury auction supply in the future,” Stith said.
In its quarterly refunding report, the Treasury Department stated that it did not expect to increase the supply of Treasuries. It said that “it believes its current auction sizes will leave it well-positioned to deal with potential changes in the fiscal outlook.”
Stith predicts that the yield for the 10-year bond could fall as low as between 4.25% and 4.5%.
The bond vigilantes – keeping spending in check
Ed Yardeni is the chief investment strategist at Yardeni Research and the president. He stresses the importance of controlling the government’s spending to keep bond rates in check. This will also appease “bond vigilantes” who may try to drive yields up to force government action.
Yardeni wrote: “The Bond Vigilantes wait to see if the Trump administration will be able to slow down the increase in federal expenditures because of the DOGE Boys’ efforts.”
If they don’t deliver sufficient spending cuts, a gunfight could break out in DOGE City with the Bond Vigilantes shooting holes into the fiscal agenda of the Trump administration, including the extension his tax cuts.
The tariff wildcard: inflationary pressures
The possibility of tariffs being implemented widely is a significant wildcard in Trump’s economic policy.
Tariffs may increase revenue but some economists warn they can also cause inflation and raise borrowing costs.
Other commentators note that tariffs can negatively impact economic growth depending on how countries react.
Lawrence Gillum, chief fixed-income strategist at LPL Financial, told Yahoo Finance that it is important to monitor the balance between risks of growth (which could push yields down) and inflation risks.
“Tariffs may initially lower the trading range of rates due to safe-haven flows. However, any significant escalation in tariffs could ultimately push yields up if they prove inflationary,” Gillum stated.
Matt Luzzetti is the chief US economist at Deutsche Bank and according to a Yahoo Finance report, he notes that tax cuts may make it difficult to reduce the deficit even with significant cuts in spending.
He suggests Treasury could increase demand for US Treasuries, by making the purchase of US Treasuries an essential condition of tariff negotiation.
He argues that it could also help achieve broader trade goals, by causing the dollar to appreciate and reducing US trade deficits.
Luzzetti also floated the idea of revaluing gold holdings in the Fed’s balance sheets at market value. He estimated a write-up that would be worth over $750 billion, which could be used to fund spending.
This multi-pronged strategy reflects the Trump Administration’s determination to influence the interest rate through market mechanisms and fiscal policies, even while they navigate the complex interplay between economic forces.
This post, Why Trump’s advisors are putting Wall Street First, Not the Fed may be updated as new information becomes available.
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