Forget the Federal Reserve. The Trump administration has outlined a new approach to lowering borrowing costs for Americans—one that focuses on cutting government spending and ramping up energy production.
While President Trump continues to call for the Federal Reserve to reduce short-term interest rates, Treasury Secretary Scott Bessent recently emphasized a shift in focus. According to Bessent, both he and the President are turning their attention away from the Fed and toward a different key rate—one determined by financial markets: the yield on the 10-year Treasury note.
This yield, which has significant implications for borrowing costs across the economy, is seen as a key indicator of long-term interest rates. Lowering it would reduce the cost of loans for individuals and businesses, making mortgages, car loans, and other forms of credit more affordable.
However, bringing down Treasury yields isn’t a simple task. Despite their efforts, the Trump administration faces significant obstacles, including some of its own policies. For one, Trump’s tax cuts have led to increased government debt, which can push up yields as investors demand higher returns to compensate for the perceived risk of lending to the U.S. government.
The Role of Treasury Yields
Treasury yields are a crucial component of the broader financial landscape. They represent the return that investors receive for lending money to the U.S. government by purchasing Treasury bonds. These yields serve as a benchmark for other interest rates in the economy, including those on mortgages, business loans, and other types of credit.
When Treasury yields rise, borrowing costs generally increase across the economy. On the other hand, when yields fall, borrowing costs decrease, making credit more accessible and stimulating investment and spending. This is why Treasury yields are so closely watched by both policymakers and investors—they play a pivotal role in determining economic conditions.
Trump’s Strategy: Cut Spending and Boost Energy
To lower Treasury yields, the Trump administration is looking to address supply-side factors that influence the market’s view of the U.S. economy. One key strategy is cutting federal spending, a move intended to reduce the national debt and ease concerns among investors about the country’s fiscal stability. By reducing the need for government borrowing, the administration believes it can help bring down Treasury yields over time.
Another major piece of the strategy involves increasing energy production. Trump has consistently promoted the idea that expanding the U.S. energy sector—particularly through oil and natural gas—will boost economic growth and reduce the need for large government borrowings. The logic is that a stronger economy would increase investor confidence, leading to lower yields on Treasury bonds.
However, both of these strategies face hurdles. Cutting government spending could be politically challenging, particularly with a divided Congress and increasing demands for spending on social programs and infrastructure. Meanwhile, increasing energy production, while boosting certain sectors of the economy, may not have an immediate effect on Treasury yields or the broader debt situation.
Internal Contradictions
The Trump administration’s push to reduce borrowing costs also faces a challenge from within its own policies. The tax cuts enacted during Trump’s presidency have led to significant increases in government debt, which can have the opposite effect on Treasury yields. When the U.S. borrows more money through Treasury bonds, the increased supply can drive yields higher, as investors demand higher returns to take on the added risk of a growing national debt.
Additionally, Trump's focus on cutting taxes and increasing government spending on defense and infrastructure may further complicate the task of lowering Treasury yields. While lower taxes may stimulate economic growth, they also reduce government revenues, potentially leading to higher deficits and more borrowing, which could push Treasury yields higher.
The Bottom Line
Lowering Treasury yields is a complex and challenging task, and the Trump administration’s efforts to achieve this goal face both external and internal obstacles. While cutting government spending and boosting energy production may help reduce borrowing costs in the long run, the administration’s own policies—such as tax cuts and rising debt—could offset those efforts.
The yield on the 10-year Treasury note will remain a critical barometer of U.S. economic conditions, and any effort to influence it will need to navigate the delicate balance of fiscal policy, government spending, and market sentiment. For now, it remains to be seen whether the Trump administration can effectively bring down Treasury yields and make borrowing more affordable for Americans.