By sidelining the Federal Reserve in order to lower borrowing costs for Americans, the Donald Trump administration says it will reduce government spending and increase energy supplies.
The payoff will be twofold: it will ease inflationary pressures and strengthen the economy’s fiscal position. While President Trump continues to urge the Fed to lower short-term interest rates, Treasury Secretary Scott Bessent recently suggested that both he and Donald Trump focus less on the central bank and more on lowering the benchmark interest rate set by financial markets: the 10-year Treasury yield. The task is not easy.
A benchmark for interest rates on everything from mortgages to corporate bonds, the swings in 10-year Treasury yields are determined by market forces and economic dynamics — and are largely beyond the White House’s control.
Bond yields fall when their prices rise, so any effort to lower them would have to either reduce government borrowing — thereby reducing the supply of bonds — or make U.S. debt more attractive to investors.
How might the Trump administration try to achieve these things and what is it facing?
1a. The most obvious way U.S. presidents can deescalate bond yields is through fiscal policy.
A smaller budget deficit means less government borrowing and a reduced supply of new bonds. This can push up the prices of existing bonds, sending their yields lower.
Bessent recently weighed in on this idea in an interview with Bloomberg Television, arguing that the 10-year yield could fall if the Elon Musk-led Department of Government Efficiency manages to reduce government spending. Markets are expecting rising borrowing costs. Bessent said the government could lower the 10-year Treasury yield through cuts in government spending.
1b. Treasury bond issuance
Governments also have discretion over the types of debt they issue. To avoid pressure on longer-term yields, the Treasury Department can issue more T-bills, which mature in a year or less, rather than bonds and notes with terms of two to 30 years.
Bessent has previously criticized the Biden administration for relying too heavily on T-bills and suggested that long-term debt issuance may need to increase.
But he took a different stance in the Bloomberg interview, saying that current auction sizes could be held steady “for the foreseeable future.”
Finally, Bessent said the administration could get the 10-year yield to “fall naturally” by increasing the supply of oil and natural gas. This, he said, would reduce energy prices and help boost what is called inflation-free growth.
2. Falling energy costs
Although the Fed often focuses on an inflation measure that excludes energy prices, which can be volatile, this could help lower interest rates.
Falling oil prices could lower the cost of other goods, such as plastics made from petrochemicals. That, in turn, could lower bond yields, which are heavily influenced by the expected path of interest rates.
The White House is seeking to ease inflation, which could help lower interest rates by boosting the supply of oil and natural gas.
What are the obstacles?
1. Big swings in bond yields are usually driven more by economic data and monetary policy signals from the Fed than by anything the White House or Treasury Department announces. But Trump’s goals face other obstacles as well.
In the case of the deficit, bond investors have long assumed that Trump’s policies would lead to a wider, not narrower, gap between revenue and spending. That was one reason bond yields rose last fall when a Trump victory began to look more likely.
2. The House Budget Committee approved a plan last week that aims for $4.5 trillion in tax cuts over a decade compared to current law.
He also targets $2 trillion in spending cuts, combined with $300 billion in new spending, likely for immigration control and defense spending. The 10-year yield was just below 4.5% on Friday, down from around 4.8% in mid-January, though still up from around 4.3% just before Trump’s election victory.
3. Many are also skeptical that Trump can significantly lower energy prices.
The president’s advisers have privately admitted that U.S. shale oil will not add much to supply. Many have argued that over-drilling during the shale boom of the 2010s drove the oil industry into bankruptcy.
Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, is also reluctant to boost global oil supplies, as it needs higher prices to balance its budget.
What has happened in the past?
The Trump administration would not be the first to try to lower interest rates in an attempt to win over bond investors.
President Bill Clinton’s administration was notorious for its obsession with bonds, prompting communications strategist James Carville to joke that he would like to be reincarnated as a bond market because “you can scare everyone.”
Although Clinton promised to cut taxes for the middle class, he dropped that promise after his victory and focused more on reducing the deficit, passing a significant tax increase in his first year in office with the goal of stimulating growth by lowering bond yields.
Overall, the strategy seemed to work in his favor. Yields fell sharply in 1993. They shot up again the following year when the Fed aggressively raised interest rates, but then fell again afterward.
Meanwhile, economic growth soared, Clinton won a second term, and the government produced a rare budget surplus.
