Important Shift in Financing Dynamics
What happened?
This past Friday, President Trump announced that he "told his administration not to do any debt beyond 9 months or so" until the new Fed Chair would be sworn in. This was reiterated by Treasury Secretary Bessent yesterday, who stated "why would [the US] issue debt at current long-rerm rates". Both comments imply an important policy pivot towards issuing more short-term debt, a move historically seen in many Emerging Markets.
Why does this matter?
No Fed Indepence: Putting a Fed Chair in place who promises to cut rates and emphasising short-end issuance effectively means that the administration can determine the interest rate it pays on its debt. This undermines the principle of an independent Central Bank.
Stimulative for Growth: Curtailing the supply of long-term paper will lead to unnaturally low long-term interest rates. This is good for growth, as many corporates fund themselves with longer-duration paper, and the housing market is driven by 10-year yields.
What's the counterpoint?
While many critics focus on the bad optics around politics meddling with the Fed, Trump may have a point with his views. The US economy is slowing, and the labor market appears increasingly fragile. Forceful action may be needed to turn the US economic tanker around.
finformant view
The US administration's pivot to emphasise short-end issuance likely means a lower US Dollar, lower long-term yields and higher gold prices as the market looks for protection against a weaker Greenback. Still, it may be warranted, given the slowing US economy.