Financial interventions by Trump escalate, driving investors ever closer to their limit of tolerance
In the world of finance, the air is buzzing with anticipation as investors grow increasingly confident that a US interest rate cut is imminent. However, this optimism is tempered by concerns about inflation, which is expected to persist further down the line.
The upcoming issuance of long-term U.S. government debt in September is set to take place in the U.S. Treasury market. If investors hold back at this issuance, it could lead to higher borrowing costs for the U.S. government, potentially causing market volatility and negatively impacting confidence in U.S. debt securities.
The bond market's response will be crucial in determining the direction of US monetary policy and potential future policies. If the bond market were to really revolt, the Federal Reserve could potentially respond with a program of long-term Treasury purchases.
The seemingly annual French political drama is helping the US, as it has shoved up the country's borrowing costs and undermined the argument that the euro and European markets are ready to fill the dollar's role in global finance. On the other hand, the comparison is being drawn between Trump's actions and the period when Turkey's autocratic leader declared high interest rates to be the "mother of all evil," causing inflation and financial market instability.
Meanwhile, the US Treasury's tentative schedule of upcoming debt auctions features only short-term debt in the coming week or so. Longer-term debt will hit the markets in early September. The reaction in US government bonds over the past week shows a steady strengthening in very short-term debt prices compared to very long-term paper.
Academics, lawyers, and former Fed officials are alarmed by Donald Trump's attempts to dismiss Lisa Cook, a governor at the Federal Reserve. Efforts to unseat Cook are not new, as Trump has been trying to control the Fed for months. This situation has sparked concerns about institutional degradation, and if it goes unchecked, outlandish policies may emerge further down the line.
Despite Trump's efforts, the US financial markets appear relaxed, with the dollar holding steady, stocks rising, and bond market nerves being hard to spot. However, the optimistic view among investors is not without its reservations. While some believe that the Fed's structure will hold, Trump's efforts to remould the central bank will fail, or that this issue doesn't matter, others are growing accustomed to institutional degradation.
If buyers refuse to buy US government debt or agree to buy only at a much lower price, they could irk Trump, but may face risks in doing so. Capital controls could be a potential consequence if there is no market rebellion.
Interest rates in the US are likely to fall soon, with or without the current noise. Governments are finding that pushing back in trade negotiations is not worth the bother due to fear of retribution. The author encourages the bond market to act as "bond vigilantes" to prevent further institutional degradation and outlandish policies.
In April, weak demand for three-year US government debt demonstrated that usually reliable Japanese and Chinese buyers stayed away, potentially spooking the Trump administration. As the financial landscape continues to evolve, the role of the bond market and the Fed in shaping US monetary policy will remain a topic of great interest and debate.
