Which Interest Rate Should You Care About?

The Importance of Watching 10-Year Treasury Yields

When thinking about interest rates, it’s easy to focus on the short-term rates controlled by the Federal Reserve. These rates, which are set by the central bank, have been relatively stable of late, and barring an unexpected financial crisis, they’re unlikely to change dramatically anytime soon. However, there’s another key interest rate that deserves attention: the 10-year Treasury yield. This rate, which has been fluctuating between 4.2% and 4.8% since the election, is a critical indicator of the economy’s health and has significant implications for investors, businesses, and policymakers.

While the 10-year Treasury yield is not unusually high by historical standards, it is notably higher than the 2.9% average seen over the past 20 years. At its current levels, this rate could potentially dampen the enthusiasm of entrepreneurs and stock investors, restraining both the stock market and the broader economy. This is a concerning development for the Trump administration, which has made economic growth a central focus of its agenda.

The Role of the Treasury Secretary and the Bond Market

The new Treasury Secretary, Scott Bessent, has made it clear that the administration is closely monitoring the 10-year Treasury yield. In an interview with Fox Business, he stated, “The president wants lower rates,” and emphasized that both he and President Trump are focused on this key metric. The administration’s desire for lower rates is not surprising, given the importance of Treasury yields in influencing mortgages, credit cards, corporate debt, and even the exchange rate of the dollar. Treasuries are also the benchmark by which other bonds—both in the U.S. and globally—are priced.

However, many of the Trump administration’s policies are having the opposite effect of what the president desires. Tariffs, immigration restrictions, and other measures have created uncertainty in the bond market, driving up yields. This dynamic highlights the delicate balance the administration must strike. While it may want to push for lower rates to stimulate economic growth, its policies often undermine this goal. If the bond market were to lose confidence in the administration’s policies, rates could rise even further, leading to slower economic growth and potentially harming the administration’s political fortunes.

The Federal Reserve and the Limits of Presidential Influence

Despite the administration’s focus on Treasury yields, the Federal Reserve remains a key player in setting short-term interest rates. The Fed’s independence is widely respected among economists and investors, and any attempt to undermine it could panic the markets. President Trump has been critical of the Fed in the past, frequently calling on it to lower rates during his first term and on the campaign trail. However, the administration has been careful not to directly interfere with the Fed’s operations, recognizing the importance of maintaining market stability.

Secretary Bessent has emphasized that the administration is not calling on the Fed to lower rates. Instead, he has argued that deregulating the economy, passing tax reform, and reducing energy costs will create the conditions for lower rates naturally. This approach reflects a broader strategy to avoid direct confrontations with the Fed while still pursuing policies that align with the president’s economic goals. For now, at least, the administration seems to have drawn a line it is unwilling to cross when it comes to the Fed.

The Dynamics of Longer-Term Interest Rates

While the Federal Reserve’s short-term rates often grab headlines, longer-term rates like the 10-year Treasury yield are influenced by a complex array of factors, including inflation expectations, investor sentiment, and economic policies. Unlike short-term rates, which are directly set by the Fed, longer-term rates are determined by the bond market, where supply and demand dynamics play a central role. This makes them much harder to predict and control.

In recent months, rising inflation has put upward pressure on the 10-year Treasury yield. In January, the Consumer Price Index (CPI) increased to an annual rate of 3%, up from 2.9% the previous month. This uptick in inflation has led to higher yields, as investors demand greater returns to offset the erosion of purchasing power over time. The Trump administration’s policies have also contributed to this trend. For example, tariffs on imported goods have raised concerns about higher prices for consumers, while restrictions on immigration could reduce the labor force and exacerbate inflationary pressures.

The Trump Administration’s Economic Policies and Their Impact

The Trump administration’s economic agenda includes a mix of policies aimed at promoting growth, such as deregulation and tax cuts. However, other measures, such as tariffs and immigration restrictions, could have the opposite effect by slowing growth and driving up prices. These conflicting dynamics create uncertainty in the bond market, where investors are constantly assessing the likely outcomes of these policies.

Oil prices, which are a major driver of inflation, have also come under scrutiny. While the administration has encouraged increased drilling and rolled back regulations on energy production, it’s unclear whether these measures will lead to lower prices. Additionally, the president’s tariffs have raised concerns about inflation among consumers, according to data from the University of Michigan’s monthly survey. The survey’s director, Joanne Hsu, noted that consumers are increasingly worried that higher tariffs will lead to higher prices, creating a potential feedback loop that could drive inflation even higher.

The Challenges Ahead and the Interconnectedness of Markets

The challenges facing the Trump administration in managing interest rates are further complicated by broader structural factors. The Federal Reserve’s efforts to reduce its holdings of government debt, for example, could put upward pressure on interest rates in the coming months. Meanwhile, the growing federal deficit and Congress’s reluctance to raise the debt ceiling add to the uncertainty surrounding long-term rates.

In this complex environment, the bond market remains a key barometer of the administration’s policies. While the 10-year Treasury yield has been relatively stable so far, there are warns that this stability may not last. The warnings from five former Treasury secretaries about the risks posed by the administration’s cost-cutting measures highlight the potential vulnerabilities in the system. At the same time, the administration’s focus on lower rates reflects its recognition of the critical role that bond markets play in shaping economic outcomes.

The interplay between inflation, interest rates, and economic policies will continue to be a central theme in the months and years ahead. As the administration navigates these challenges, it will need to carefully balance its goals of promoting growth and managing interest rates. The bond market, for its part, will remain a powerful force in shaping the economic landscape—one that policymakers ignore at their peril.