In this week’s episode, we (Gary Gensler and Simon Johnson) discuss how to interpret the recent rise in yields (i.e., interest rates) on long-term US government debt. The increase in interest rates matters for mortgage rates, credit cards, how much it costs to service the federal debt, and much more. Yields in the bond market are telling us something, but well-informed observers disagree on exactly what the message is.
At one level, the basics are simple and incontrovertible: investors are only willing to hold 10- or 30-year US Treasury securities if they receive more compensation (that’s the interest rate) to offset what they now see as the higher risk involved. But how much of this repricing of risk is due to a normalization of rates after many years of Federal Reserve policies holding down long-term rates? How much is due to concerns about longer term inflation, the US fiscal picture (e.g., federal budget deficits around 6% of GDP), or high borrowing demands of the AI-oriented investment boom (i.e., large-scale issue of bonds by tech companies)?
We take listeners through the basics and explain the jargon. We also demystify some of the discussion currently swirling. We then walk through the economics and politics of recent moves by the US Treasury Secretary attempting to limit interest rate increases.
There remains a genuine debate: are yields rising as part of a normalization of interest rates after a very low period of artificially low rates? Or do global markets sense that fiscal policy in industrial economies is not under control - and that the political will to make adjustments is nowhere (yet) to be seen?
Here are a couple of historical items that provide more background on some of the experiences we discuss.
How monetary policy operated immediately before the modern era: ‘Yield Curve Control in the United States, 1942 to 1951’, by Jonathan Rose, Federal Reserve Bank of Chicago, Economic Perspectives, No. 2, October 2021.
The Kennedy Administration’s effort to influence the yield curve: ‘Operation Twist and the Effect of Large-Scale Asset Purchases’, by Titan Alon and Eric Swanson, Federal Reserve Bank of San Francisco, FRBSF Economic Letter 2011-13, April 25, 2011.
This March 2020 (COVID-times) speech by Lael Brainard on yield curve control.
