A Attention The Federal Reserve kept the policy rate unchanged during the first half of 2025. Was trying it trace Whether of Trump Administration Conservationist measures One -time price level shift will result in results, or whether fundamentalist efforts to reopen global trade patterns can increase inflation.
But the fact is that there have not been policy rates since last December, affecting President Trump. He has repeatedly cast American monetary authorities for his reluctance to cut rates. Assuming that the fed has fallen Behind the curvePresident Trump has taken refer The fed chair “too late” as Jerome Powell.
In encompassing manner Worry Around American fiscal stability, President Trump recently suggested Policy rates must be cut significantly to help Federal Reserve lower Growing Interest rate cost Large -scale government loans are associated with service. Trump is gone For the state till now That he would cut the side of someone’s side to become the next chair of the fed.
Independent analysts estimate the US debt-to-GDP ratio Horoscope Upwards “after passingBig, beautiful bill“Also, there is a lack of budget expected To continue more than 6 percent of GDP in the coming decade (first level) get Only during the crisis period). These developments, with political pressure on the fed for low interest rates, Raise the speaker Fiscal dominance of monetary policy.
The “fiscal dominance” refers to a landscape in which a government’s fiscal requirements (a large -scale large debt burden or continuous deficit) start reducing or even determines the central bank’s functions, compromising their ability to conduct independent monetary policy. Economic written And History It has shown that the fiscal dominance of monetary policy often increases inflation levels.
“Financial Daman” refers to those policies that aim to help governments gradually deliver over time with the aim of artificially keeping interest rates low. Economists have Thrown light on Financial oppression, important role in combination with inflation, was played in reducing the loan after World War II. Controlled interest rates (via clear or indirect cap on interest rates), capital control and other economically oppressive measures sử dụng After World War II by America and other advanced economies.
To encourage more and more private sector procurement, there are relatively modest in the realm of several measures on Envil. For example, proposed Easy Supplementary leverage ratio requirements require requirements (expect a step Increase Due to the passage of treasury banks without violating the benefits regulations) and the passage of the so -called Talented act (As expected to encourage The purpose of using stablecoins and thus promotes the demand for short-dated treasury bills) is to raise the demand for the Treasury market.
Looking forward, more dramatic measures may be necessary to reduce the debt burden. In recent years, there has been one Greater To meet the ballooning deficit, roll on the short-dated treasury bill and roll on mature. it is Reduced Average period of US government loan. If the bow to the fed Political pressure And reduces the policy rate (and thus effectively reduces the treasury bill rates), it will temporarily help the efforts of the Trump administration to reduce the interest rate burden.
Majority Of the outstanding loans, however, it is still in the form of long -term dated securities (mainly Treasury notes and bonds). The Fed effectively controls short -term interest rates and can also affect future short -term rates through future guidance (public communication by monetary authorities of anticipated direction of future short -term policy rates). However, prolonged-Horizone interest rate expectations and term Premia are not directly controlled by the central bank.
Macroeconomic fundamental, such as prolonged inflation expectations and Natural interest rateLong -term interest rates are important determinants of expectations. In addition, the term Premia is likely to be influenced by the uncertainty of inflation and the underlying changes in the treasury market supply-demand dynamics (such as change in foreign/safe-heven demand).
As a loan-to-GDP ratio increases Hazardous levelsAnd as suspected around the reserve situation of the dollar emergeThe risk of a word premium spike is important. If the demand for long-term treasury securities from abroad suddenly falls, and if there is a concomitant flight of the yield curve by domestic investors, the pressure will essentially mount to the fed to return to quantitative ease-to acquire a long-term dated securities using the reserves created by the central bank. Under current circumstances, it will be tentmount Make money Part of American debt.
Even if the interest rates are kept artificially low, inflation pressure is elevated, a real risk that investors and savings will have to face silence of the required adjustment cost to achieve fiscal stability. Given the position of America as a rich, mature economy with an aging population, it is not likely That, even with one AI revolutionWe can increase our way of spilling debt nets. absent Effective policies To reduce budget deficiency and maintain the global attraction of Treasury, bond investors must be designed for fiscal dominance and financial suppression.
Vivekananda Jayakumar, PhD, is an associate professor of economics at Tampa University.
