Donald Trump’s administration is charting a course that looks beyond the Federal Reserve, seeking to lower borrowing costs for Americans by influencing a key rate shaped more by Wall Street than by the central bank in Washington, D.C. The focus? The 10-year Treasury yield.
National Economic Council Director Kevin Hassett recently signaled this strategic pivot.
In an interview with CBS’s Face The Nation, Hassett emphasized the importance of the 10-year Treasury yield as a market-driven indicator of inflation control.
“One way to tell whether markets think ‘are we getting inflation under control’ is to look at longer term interest rates that the Fed doesn’t affect directly,” Hassett stated.
He further explained that managing inflation would alleviate pressure on the Federal Reserve.
This approach was initially highlighted a few weeks earlier by Treasury Secretary Scott Bessent, who revealed that both he and the President were closely monitoring the 10-year Treasury.
Bessent clarified that Trump was “not calling for the Fed to lower rates,” signaling a different avenue for easing borrowing costs.
The ‘3-3-3’ plan: a blueprint for economic growth and fiscal discipline
The administration’s strategy centers on policies designed to stimulate economic growth, enhance productivity, and curb government spending.
Bessent has coined this plan “3-3-3,” with the goals of reducing the deficit to 3% of GDP (from the current 6%), achieving a sustained growth rate of 3%, and increasing oil production by 3 million barrels per day.
James Fishback, CEO of investment firm Azoria, believes that these policies will have a tangible impact on inflation and the 10-year yield.
“By reining in inflation and spurring growth, President Trump’s policies will lower the cost of borrowing and free up capital for productive investments,” Fishback wrote in a research note.
“The natural market response is a downward pull on the 10‑year Treasury yield.”
The DOGE factor: Elon Musk’s role in cutting waste
A key component of this plan is the effort led by Elon Musk’s Department of Government Efficiency (DOGE), which aims to identify and eliminate wasteful government expenditures.
Fishback sees DOGE as instrumental in reducing the fiscal pressures that contribute to inflation and higher yields.
“Less waste means less inflation, which is good news for borrowers,” said Fishback.
Influencing the 10-year yield is a complex undertaking.
While the Fed’s short-term rates can exert some influence, a multitude of factors play a role, including economic growth projections, inflation expectations, and the supply of Treasuries.
The inverse relationship between bond yields and prices means that rising inflation typically leads to higher yields, as investors demand greater compensation for the eroding value of their investments.
The 10-year US Treasury yield experienced volatility, rising from 3.6% to 4.8% by mid-January before settling around 4.5%.
Fluctuations have continued, influenced by inflation readings, Treasury supply expectations, and international factors.
Despite these challenges, Hassett remains optimistic, stating that:
The 10 year treasury rate has dropped about 40 basis points over the last couple of weeks while we announced our plan to control inflation. That saved the American people about $40 billion, just from talking about the stuff that we’re about to do.
Musk has echoed this sentiment, stating on X that “as it becomes clear” DOGE “is working, you will see the long-term Treasury bill yields fall.”
He added that this would translate into lower interest payments for Americans on mortgages, small business debt, and credit card loans.
The supply-side solution: lowering the deficit
Wilmington Trust bond portfolio manager Wilmer Stith believes that reducing the deficit, and thus the supply of Treasuries, is the most potent tool for lowering the 10-year bond yield.
“If DOGE really makes a sizable impact and Elon Musk and his team can start paring down billions and billions of dollars, that would be a good thing in terms of this concern of larger Treasury auction supply coming forward,” Stith said.
The Treasury Department has indicated that it does not anticipate increasing the supply of Treasuries, stating in its quarterly refunding statement that it “believes its current auction sizes leave it well positioned to address potential changes to the fiscal outlook.”
Stith anticipates that the yield on the 10-year could drop as low as a range of 4.25% to 4.5%.
The bond vigilantes: keeping spending in check
Ed Yardeni, chief investment strategist and president of Yardeni Research, emphasizes the importance of controlling government spending to keep bond yields in check and appease the so-called “bond vigilantes,” who can drive yields higher to force government action.
“The Bond Vigilantes are biding their time, waiting to see how much the Trump administration can slow the increase in federal spending because of the efforts of the DOGE boys,” Yardeni wrote.
If they don’t deliver enough spending cuts, there could be a gunfight at DOGE City, with the Bond Vigilantes shooting holes in the Trump administration’s fiscal agenda, including the extension of his tax cuts.
The tariff wild card: potential inflationary pressures
One significant wild card in Trump’s economic policies is the potential implementation of widespread tariffs.
While tariffs could increase revenue, some economists warn that they could also be inflationary and push up borrowing costs.
Others note that tariffs could negatively impact economic growth, depending on how countries respond.
Lawrence Gillum, chief fixed income strategist for LPL Financial, told Yahoo Finance the importance of monitoring the balance between risks to growth (which would push yields lower) and inflation risks (which would push yields higher).
“Tariffs could initially drive a lower trading range for rates through safe-haven flows, but any significant escalation could eventually push yields higher if tariffs prove inflationary,” Gillum said.
According to Yahoo Finance report, Matt Luzzetti, chief US economist for Deutsche Bank, notes that tax cuts could make it challenging to reduce the deficit, even with significant spending cuts.
He suggests that Treasury could boost demand for US Treasuries by making purchases of US Treasuries a condition of tariff negotiations.
He argues that this could also advance broader trade goals by leading to dollar appreciation and smaller US trade deficits.
Luzzetti also floats the idea of revaluing the gold holdings on the Fed’s balance sheet at market value, estimating a write-up of over $750 billion that could be used to finance spending.
This multi-pronged approach reflects the Trump administration’s determination to influence interest rates through market mechanisms and fiscal policy, even as they navigate the complex interplay of economic forces.
The post Why Trump’s advisers are putting Wall Street first, not the Fed appeared first on Invezz