At Chairman Jerome Powell’s press conference after the FOMC rate decision, he was about mortgage rates rising a point since the easing cycle began which has pushed mortgage rates above 7%. Powell noted that longer rates have gone up. However, he noted that this was “not principally because of expectations about our policy or about inflation; it’s more a term premium story.”
- What is Term Premium? It’s the extra compensation investors demand for holding longer-term debt.
What is Happening Now? In an uncertain rate environment or a rising rate environment, the spread between short and long-term debt will expand. This is because investors will be wary of tying up their money when short-term rates could rise which would drop the price of their long-term bonds. Therefore, to entice investors, longer-term rates have to rise.
Bessent’s Plan: Treasury Secretary Scott Bessent told Fox Business’s Larry Kudlow that President Donald Trump wants lower interest rates. “He and I are focused on the 10-year treasury” Bessent went on to say that “[Trump] is not calling for the Fed to lower rates. He believes that if we do all things that we talked about today…then rates will take care of themselves and the dollar with take care of itself.”
How? Bessent told Kudlow he and Mr. Trump have a 3-3-3 plan that would calm inflation fears and lower interest rates.
- Getting the deficit to GDP down to a long-term average of around 3.5%.
- Cutting regulations and sending a signal to the markets of 3%+ economic growth, non-inflation economic growth.
- Three million more barrels equivalent of energy produced by the US
Bottom Line: If the Trump administration can accomplish their goal of non-inflationary economic growth then rates could fall without the Fed having to cut rates (AKA the term-premium spread falling). However, this is pretty much the goal of every president and sometimes it works and sometimes it doesn’t.
