The Federal Reserve may breathe a sigh of relief! The U.S. Treasury Secretary stated that the Trump administration is focused on the 10-year Treasury yield rather than interest rate cuts

According to the Zhitong Finance APP, on Wednesday, U.S. Treasury Secretary Scott Basset revealed in an interview that the Trump administration is focusing its policy on the 10-year U.S. Treasury yield rather than directly pressuring the Federal Reserve to cut interest rates in order to lower borrowing costs. This statement provided temporary relief to Federal Reserve Chairman Jerome Powell, but market participants raised many doubts about the feasibility of this approach.

Basset stated that President Trump did not ask the Federal Reserve to lower interest rates but hopes to influence the 10-year Treasury yield through policy to let it "naturally" decline. He believes that a series of economic policies from the Trump administration can lead to a drop in long-term interest rates without the Federal Reserve's active intervention.

This statement alleviated market concerns about the Trump administration interfering with the independence of the Federal Reserve. On January 23 of this year, Trump publicly called for an immediate interest rate cut from the Federal Reserve, raising concerns about potential future pressure on the Fed. However, Basset's latest statement suggests that the Trump administration may temporarily abandon the strategy of directly intervening in monetary policy.

Although the government emphasizes that the decline in long-term interest rates may be a natural result of policy, market participants believe that the reality is far more complex than imagined.

Mark Malek, Chief Investment Officer at New York wealth management firm Siebert, bluntly stated, "Who really controls the 10-year Treasury yield? The answer is simple: the market." He pointed out that market expectations for inflation are the key factors determining long-term Treasury yields. Tariffs, expanding fiscal deficits, and increasing government debt are all risk factors that could lead to rising inflation, ultimately pushing long-term interest rates up rather than down.

Data shows that since September 16, 2023, the 10-year Treasury yield has risen from 3.622% to 4.802% on January 13 of this year, an increase of more than 1 percentage point. Recently, due to the Trump administration's decision to impose tariffs on Mexico and Canada and the subsequent announcement to delay implementation, the 10-year Treasury yield briefly fell to 4.44%.

Market concerns are growing that as the U.S. fiscal year 2024 budget deficit is expected to approach $2 trillion, fiscal deficits may continue to rise in the coming years, leading to increased supply of U.S. Treasuries, further pressuring Treasury prices and pushing yields higher. This means that even if the Trump administration hopes to lower long-term interest rates, the market environment may not support this goal.

Market experts believe that the Trump administration still has several ways to influence long-term Treasury yields, but the feasibility and effectiveness of these methods are in doubt.

Federal Reserve intervention—"yield curve control." One possible way is for the Federal Reserve to enter the open market to purchase long-term Treasuries, thereby pushing up Treasury prices and lowering yields. However, this "yield curve control" is not common in U.S. history, with the most recent similar operation dating back to 1942 during World War II, when the Federal Reserve controlled long-term interest rates to help finance the government. Additionally, the Bank of Japan has long implemented similar policies, keeping short-term rates at -0.1% and controlling the 10-year Treasury yield close to 0%, but whether the Federal Reserve will take similar actions remains highly uncertain.

Treasury debt adjustment—"reverse operation." Another way is for the U.S. Treasury to repurchase long-term Treasuries and refinance by issuing short-term bonds This approach is similar to the "Operation Twist" implemented by the Federal Reserve in 2012, aimed at influencing market interest rates by adjusting the maturity structure of government bonds.

Although this strategy may have a short-term impact on the yield of 10-year Treasury bonds, Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, believes that the long-term effects of this policy are not significant. He pointed out, "The biggest driver of the market remains inflation. If inflation remains high, any artificial policy intervention will struggle to keep interest rates low."

Currently, the U.S. economy continues to grow strongly, with GDP growth maintaining a range of 2%-2.5%, while the inflation rate remains at 2.5%-3%. In this context, there is limited room for long-term interest rates to decline. Faranello stated, "If energy prices can decrease, both long-term and short-term interest rates may fall, but if factors like trade tariffs are added, the market's interpretation becomes more complex."

Moreover, there are a large number of newly issued U.S. Treasury bonds in the market every month to support government fiscal spending, making it difficult for long-term interest rates to continue to decline. Faranello added, "The government can consider policies similar to 'Operation Twist,' but the implementation capacity of such strategies is limited, and their impact on long-term interest rates is not significant."