{"id":12,"date":"2025-08-19T18:22:01","date_gmt":"2025-08-19T18:22:01","guid":{"rendered":"https:\/\/jon-hilsenrath.ledewire.com\/?p=12"},"modified":"2025-09-10T15:38:37","modified_gmt":"2025-09-10T15:38:37","slug":"looking-glass-economics-whats-going-down-with-long-term-interest-rates","status":"publish","type":"post","link":"https:\/\/jon-hilsenrath.ledewire.com\/?p=12","title":{"rendered":"LOOKING GLASS ECONOMICS: What’s going down with long-term interest rates?"},"content":{"rendered":"\n

Yields on 10-year Treasury notes rose 0.85 percentage points during the three months last year when the Federal Reserve cut short-term interest rates by a full percentage point. In the seven+ months since the Fed stopped reducing short-term interest rates, yields on 10-year Treasury notes have dropped about a quarter percentage point.<\/p>\n\n\n\n

Conventional thinking goes like this: When the Fed cuts its benchmark interest rate, the federal funds rate, all interest rates should fall. However that is a cartoonish view of how credit works. Investors in long-term debt like a 10-year Treasury note care not just about the short-term interest rate. They also care about the long-run inflation outlook and other risks like default. Long-term yields do not always move in line with Fed policy.<\/p>\n\n\n\n\n\n

The bond market may have been signaling last year that the Fed cut rates too aggressively and increased the risk of more inflation. Investors thus demanded some premium when buying U.S. debt and pushed up the rate at which they were willing to buy 10-year notes. Hence yields rose during the rate-cutting cycle.<\/p>\n\n\n\n

Since the Fed went on hold last December, long-term rates have drifted lower, possibly signaling less concern about inflation and hence less premium because the Fed paused rate cuts before it went too far with rate cuts.<\/p>\n\n\n\n

Put another way, the Fed may be helping to hold down long-term interest rates (and the cost of government debt financing and mortgage costs) by leaving its short-rate alone until its sure that inflation comes back down. This is not a popular or conventional view in Washington these days, but it holds up with market developments. Be careful what you wish for when you demand the Fed start cutting rates again. You might just get the opposite of what you want.<\/p>\n\n\n\n

SIDENOTE: To people out there saying that the Fed’s rate cutting decisions last year were politically motivated to benefit President Biden — half of last year’s rate cuts came before the election and the other half came after the election, when they only could have helped Trump. The charge strikes me shallow and incomplete at best.<\/p>\n\n\n\n

In all the Fed raised interest rates by 4.5 percentage points on Biden’s watch between 2021 and 2024, risking recession to get inflation down. On Trump’s watch between 2017 and 2020 the Fed in all cut rates by a little more than half percentage point and launched an enormous new bond purchase program to bolster the economy when Covid hit. Even before Covid, Fed’s policies included fairly aggressive interest rate cuts in 2019 when inflation slowed.<\/p>\n\n\n\n

I am not apologizing for the institution; the Fed’s made many mistakes, in my view including overly aggressive rate cuts and bond programs in 2020, and delays raising rates in 2021 and early 2022. But people complaining about the Fed being political strike me as making political arguments in their own right; shallow, whiny and victimized, too.<\/p>\n\n\n\n

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