Treasury Secretary Scott Bessent has a new plan in the fight to bring down historically high interest rates, and it’s got nothing to do with the Federal Reserve.
Bessent, in two interviews this week, said the Trump administration wants to focus on lowering long-term interest rates, which are largely influenced by the yield on the 10-year US Treasury note. The Fed’s decisions, on the other hand, have a more direct effect on short-term interest rates, which control borrowing costs for Americans.
On his fourth day in office, President Donald Trump said he will “demand that interest rates drop immediately” and that he understands monetary policy “much more” than the central bank and its leader, Chair Jerome Powell. He has also advocated that Powell be fired, though he has walked that back in recent comments.
“He is not calling for the Fed to lower rates,” Bessent told Fox Business on Wednesday. Instead, he said, the Trump administration is focused on lowering the 10-year Treasury yield. “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,” he said.
On Thursday, Bessent told Bloomberg TV that “we are not focused on whether the Fed is going to cut.”
That might come as some relief to Powell, since it’s an implicit admission that the administration intends to respect the central bank’s right to make monetary policy decisions without any political influence.
The Fed holds the main key to controlling the interest rates Americans pay to borrow money, predominantly by buying and selling government debt. Bessent’s plan of having the Treasury Department diverge from the Fed is unusual.
“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.”
The 10-year yield’s journey
The rates Americans pay on mortgages, credit cards and other kinds of loans are largely based on that of the 10-year Treasury yield. While the Fed’s monetary policy actions influence it, the 10-year Treasury yield is free floating, meaning that any number of factors can cause it to go up or down beyond the Fed.
For instance, in times of heightened geopolitical conflicts, investors tend to buy more US debt, including 10-year Treasury notes, which are deemed safe, stable assets to invest in, particularly during times of uncertainty. The flight to safety pushes yields down, which makes it cheaper for Americans to borrow money.
As Bessent pointed out in his Fox Business interview, when the Fed cut rates by an unusually large half-point in September, the 10-year yield should theoretically have fallen. However, it ended up moving higher. That remained the case even after the Fed cut rates twice more last year.
Since Trump took office, the 10-year yield has dropped a little. Bessent sees that as a reflection of traders recognizing that holding US government debt is less risky if federal spending is cut.
White House Press Secretary Karoline Leavitt said last week the administration is forging ahead with its plans to “end the egregious waste of federal funding,” which is being partly facilitated through the so-called Department of Government Efficiency, led by Tesla CEO Elon Musk.
The Trump administration has said it is focused on boosting economic growth through “expansionary” policies. Its plan to gut government agencies and reduce spending could enable that growth to not be inflationary, positively impacting Treasuries.
“They want growth to be buoyant but they also want to limit inflation expectations by showing some discipline on spending, and expectations of higher inflation are quite risky now because of the potential of tariffs to re-ignite goods inflation,” José Torres, senior economist at Interactive Brokers, told CNN.
“Plus, the focus on the 10-year yield re-establishes that monetary policy independence we’ve had for so long, which should exclude any political influence. I think that’s a good precedent to reemphasize,” Torres said.
