US President Donald Trump responded to strong jobs numbers by demanding lower interest rates. With inflation still high, the same data strengthen the case for the Federal Reserve to raise them.
The Treasury, meanwhile, is trying to hold down bond yields while the government’s borrowing helps push them higher. Its latest increase in long-term debt buybacks, just $2 billion against expectations of $8 billion–$10 billion, has failed to arrest the rise in yields.
Washington wants cheaper money. But its spending, borrowing and trade policies are making that harder to deliver, leaving the Fed caught between the administration’s demands and an economy that offers little justification for lower rates.
The tools of macroeconomic control work best when they reinforce each other and retain credibility. Fiscal, monetary and supply-side efforts need to be consistent with each other and in sync with the economic backdrop. In the US, they are increasingly working at cross-purposes.
The House Rules
The Treasury Secretary’s declaration, “I am the house”, and his challenge to speculators betting against the yen are unfortunate. Alongside intervention in US rates, they risk making the US economy, and indeed the global economy, look like a casino run by speculators. The US president’s self-congratulatory posts about his stock trading prowess, based on the stakes taken by the administration in companies such as Intel, US Steel and Westinghouse, only buttress this view. Economically, this is interventionist and questionable given the booming stock market backdrop.
The gap between the Treasury’s rhetoric and the size of its additional buybacks has done little for its credibility. Suggesting that funds in the Treasury General Account, the US government’s account for meeting day-to-day expenses, could be used to scale up interventions is outright irresponsible.
To prevent Japan from selling Treasuries to fund yen intervention and pushing yields higher, the US Treasury has intervened directly using the euro. It has strongly suggested greater use of the Fed’s repo facility, which would allow Japan to raise dollars for intervention without selling Treasuries.
Yet recent numbers point to recent sales of US treasuries by Japan of about $100 billion presumable to fund intervention, many times the size of the Treasury’s additional buybacks, quite in opposition to what the Treasury Secretary’s wishes. Not appreciating the long term dangers of intervening in the yen market, a key component of the global carry trade that has supported US assets in particular, also seems reactive rather than considered. Put together, these actions give an impression of flailing in all directions without focus.
The bigger obstacle to lower yields, however, lies in Washington’s borrowing requirements. US fiscal policy shows no signs of being consistent with what is needed to drive rates lower. Borrowing by the government continues to surge, even as it competes for funds with hyperscalers borrowing to fund AI capital expenditure. Both are drawing on the same pool of capital, adding to upward pressure on yields. Other than the initial flurry of misdirected efforts from DOGE, there is little effort to curb spending.
With the Iran war persisting, defence-related spending is enormous, to say nothing of the war’s impact on oil and inflation. Tax cuts are being contemplated, which would only worsen the fiscal position. There is reduced fiscal space to provide countercyclical support to the economy should the implosion of the AI-driven bubble cause a severe recession.
Heavily contested tariffs appear to be the only significant source of additional revenue envisaged, no matter that these are ultimately paid for by the US consumer and result in inflation. Restricting trade arbitrarily in an open economy does not appear to be very responsible either.
While tariff arm-twisting and the resulting supply-side policies aimed at bringing manufacturing to the US may help, costs of manufacturing in the US are unlikely to justify such moves other than in select industries. Relocation would also take considerable time. Tariffs cannot quickly resolve the fiscal problem, and their inflationary effects complicate the argument for lower rates.
Rock vs Hardplace
At the Fed, meanwhile, the policy conflict is becoming harder to sidestep. Warsh appears stuck between a rock and a hard place. Persistently high US inflation strengthens the case for higher rates. Yet he has done little to suggest that this is the way forward.
Nominated and confirmed on the strength of his bias towards lower rates, with a somewhat specious argument that AI will increase productivity, he has thus far refused to provide any guidance after the Fed meetings he has chaired. At Jackson Hole, however, to his credit, he did sound more hawkish than expected.
The stellar employment numbers strengthen the case for a rate hike given the persistent inflation backdrop. Trump’s immediate insistence that the figures instead called for lower rates suggests an attempt to head off that outcome.
Indeed, prediction markets and futures still put the probability of a rate hike in September at only around 50%. A hike would run directly against the administration’s efforts to lower rates. A hold risks undermining the Fed’s credibility after Jackson Hole and the employment numbers. Neither choice resolves the contradiction between fiscal policy and the demands being made of monetary policy.
What is clear is that the stewards of the US economy are operating without evident coordination, pursuing policies that appear inconsistent with economic realities. History is replete with examples of the severe economic consequences of inconsistent policy and a loss of credibility, from Greece and Argentina to Great Britain. One could indeed argue that the EU has remained moribund for so long precisely because its very design allows, and even forces its constituent economies into inconsistent and incoherent policies.
The US has so far been cushioned by three related strengths: the dollar’s reserve currency status, the US consumer, and the technology boom. Threats to any of these would have serious consequences for the US and, by extension, the global economy.
For now, Washington is asking the Fed and the bond market to deliver lower borrowing costs while its own policies work against them. Neither presidential demands nor Treasury buybacks can make that contradiction disappear.
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