United States: Long-term interest rates as a barometer of policy operations
2025-03-27
■ Financial markets can force the U.S. government to adjust its policy operations by providing credit for government debt
■ The U.S. government recognizes the need to maintain long-term interest rates stable in its policy operations and is promoting measures to curb interest rate increases while implementing tariffs.
Previously, it was noted that one of the necessary conditions for the U.S. government to adjust its tariff policy trajectory is a significant deterioration in economic indicators, which in turn leads to a loss of political capital. In addition to voters being able to directly force the government to adjust its policies through voting, financial markets are also an important force that can force the U.S. government to revise its tariff policies. By providing credit (credit granting) for government debt, financial markets can influence the government's financing costs, thereby indirectly demanding policy revisions or adjustments. The "Bond Vigilantes" who correct fiscal slack by raising market interest rates are a representative example.
Compared to the first administration from 2017 to 2020, the U.S. government has paid significantly less attention to the stock market and has made few statements aimed at boosting stock prices. On the contrary, the government has increased its attention to the bond market, and the president and the secretary of the treasury have clearly expressed their desire for long-term interest rates to fall. However, the government's current attitude in asking the Federal Reserve (FRB) to cut interest rates is significantly more restrained than during the first administration.
These developments reflect that the US government has realized that in order to smoothly implement the policies promised in the campaign, it is crucial to maintain a low and stable long-term interest rate. Generally speaking, the rapid implementation of tariff policies will push up inflation expectations, while large-scale tax cuts will further aggravate supply and demand tensions, thereby accelerating inflation. Both are potential factors that push interest rates up, thus constraining policy operations. Finance Minister Bessent proposed to reduce the fiscal deficit to 3% of nominal GDP. Under the leadership of the newly established US Government Efficiency Department in the second government, administrative restructuring and fiscal spending cuts are being rapidly promoted. This is not only to reduce government intervention and concentrate presidential power, but also to curb the rise in long-term interest rates.
As Finance Minister Bessent described it as a "detox period", the US government is tolerating the short-term economic slowdown caused by fiscal tightening, showing a posture of temporarily prioritizing structural reforms rather than economic expansion. The bond market has accepted this policy direction, so even with the introduction of aggressive tariff policies, US long-term interest rates remain relatively stable. In the future, in the process of promoting tariff increases and implementing tax cuts, whether the stability of long-term interest rates can be maintained will become an important indicator to measure the credibility of the US government's policy operations.
■ The U.S. government recognizes the need to maintain long-term interest rates stable in its policy operations and is promoting measures to curb interest rate increases while implementing tariffs.
Previously, it was noted that one of the necessary conditions for the U.S. government to adjust its tariff policy trajectory is a significant deterioration in economic indicators, which in turn leads to a loss of political capital. In addition to voters being able to directly force the government to adjust its policies through voting, financial markets are also an important force that can force the U.S. government to revise its tariff policies. By providing credit (credit granting) for government debt, financial markets can influence the government's financing costs, thereby indirectly demanding policy revisions or adjustments. The "Bond Vigilantes" who correct fiscal slack by raising market interest rates are a representative example.
Compared to the first administration from 2017 to 2020, the U.S. government has paid significantly less attention to the stock market and has made few statements aimed at boosting stock prices. On the contrary, the government has increased its attention to the bond market, and the president and the secretary of the treasury have clearly expressed their desire for long-term interest rates to fall. However, the government's current attitude in asking the Federal Reserve (FRB) to cut interest rates is significantly more restrained than during the first administration.
These developments reflect that the US government has realized that in order to smoothly implement the policies promised in the campaign, it is crucial to maintain a low and stable long-term interest rate. Generally speaking, the rapid implementation of tariff policies will push up inflation expectations, while large-scale tax cuts will further aggravate supply and demand tensions, thereby accelerating inflation. Both are potential factors that push interest rates up, thus constraining policy operations. Finance Minister Bessent proposed to reduce the fiscal deficit to 3% of nominal GDP. Under the leadership of the newly established US Government Efficiency Department in the second government, administrative restructuring and fiscal spending cuts are being rapidly promoted. This is not only to reduce government intervention and concentrate presidential power, but also to curb the rise in long-term interest rates.
As Finance Minister Bessent described it as a "detox period", the US government is tolerating the short-term economic slowdown caused by fiscal tightening, showing a posture of temporarily prioritizing structural reforms rather than economic expansion. The bond market has accepted this policy direction, so even with the introduction of aggressive tariff policies, US long-term interest rates remain relatively stable. In the future, in the process of promoting tariff increases and implementing tax cuts, whether the stability of long-term interest rates can be maintained will become an important indicator to measure the credibility of the US government's policy operations.