Fed chair Jerome Powell did open the door to lowering the federal funds rate (FFR) in its September Federal Open Market Committee meeting later this week. He noted that emerging downside risks to the labour market and the “shifting balance of risks may warrant adjusting our policy stance”. (The Fed has a dual mandate: to maintain price stability and full employment.) The modestly dovish statement sent equity markets soaring (the Dow Jones Industrial Average hit a fresh all-time high that day), the two-year Treasury yields fell but yields on 10- and 30-year treasuries rose. In other words, the yield curve steepened as we had expected. Forcing short-term rates down in an inflationary environment will cause longer-term rates to rise.
The US Treasury yield curve is steepening. And the same is happening in the rest of the world. The latest uptick in long-term yields comes as US President Donald Trump persisted with his audacious bid to sit a “majority” of his nominees on the Federal Reserve board of governors, those who would back his call to lower interest rates. He has been publicly pressuring the Fed to cut interest rates for months. The reason is simple. The US has nearly US$30 trillion ($38.5 trillion) in outstanding debt held by the public, of which some US$9 trillion is due for refinancing within the next 12 months. Debt servicing cost has risen sharply since 2022 on the back of higher interest rates and is eating up a growing percentage of government revenue.
We had previously written about the mounting risks of high and rising US debt-to-gross domestic product (GDP) following decades of persistent trade and fiscal deficits, even as its share of the global economy fell. (Scan the QR code to read “The coming of a perfect financial storm?”)
