Trump wants the Fed to control more than it can. 
If President Trump gained control of Fed policy, monetary decisions would cater to short-term political goals rather than the long-term stability.
Misguided Play for All the Marbles
The Daily Economy comments on Trump Plays for All the Federal Reserve Marbles
After the dismal July jobs report, President Trump has doubled down on his efforts to pressure the Federal Reserve to lower its target overnight interest rate (FFR).
Two of his proxies on the Federal Open Market Committee (FOMC), Chris Waller and Michelle Bowman, dissented from the FOMC’s decision to leave the Fed’s target FFR unchanged. And his recent appointment of Stephen Miron to replace Adriana Kugler move the Fed more in President Trump’s direction. But even if Trump gets the interest rate target cuts he has been lobbying for, it likely won’t satisfy him.
That’s because he, and many others, are actually concerned about interest rates other than the one that the Federal Reserve sets. Mortgage rates and corporate borrowing rates are tied to the 10-year Treasury bond rate – which also happens to be an important interest rate for the cost of federal government borrowing. While lowering the short-term rate seems like it would put downward pressure on the 10-year rate, this is not necessarily the case. In fact, the FFR is 1 percent lower than a year ago, while the 10-year is .2 percent higher than a year ago.
The 10-year interest rate has not declined because the large increase in government bond supply—driven by high Congressional spending—pushes rates upward. The supply must decrease or the demand must increase for 10-year bonds before the 10-year interest rate will fall. If Congress were to slash the budget deficit, the 10-year rate would fall on the expectation that the future supply of 10-year Treasury bonds will diminish.
But there is another avenue to artificially lower the 10-year rate that Trump has not pushed yet. That avenue entails the Federal Reserve buying longer-term US debt. This has been done before by the Fed under Chairman Bernanke’s Quantitative Easing (QE) programs. It was called Operation Twist. In 2011, the Federal Reserve sold about $400 billion of short-term government debt and replaced it with long-term government debt in order to drive down long-term interest rates.
While this program successfully repressed longer-term interest rates, one can question the merits of such a policy. After all, lowering the cost of federal borrowing made it easier for Congress to run up the debt.
One of the dangers of the FOMC caving to Trump’s pressure to lower the FFR is that he will almost certainly push them to engage in an Operation Twist-style bond-buying program if the 10-year rate fails to fall; and it likely won’t, given that we have trillion-dollar deficits as far as the eye can see.
Playing games with the central bank and creating new currency to finance irresponsible deficit spending is the practice of struggling third-world countries. As the wealthiest nation in the world, we should ask more of our leaders and of our central bank officials.
A Word About Control
I created the lead chart to show what the above article is saying.
The Fed can “control” only one thing at a time. It can lower the Fed Funds rates, but it cannot control how the economy performs at that rate. Artificially stimulating jobs also stimulates inflation.
The same applies to misguided efforts to suppress the long end of the curve by direct QE intervention.
Q: Didn’t we just try that? Did we like the inflation result?
A: Yes and no.
Trump wants to bully the Fed to lower rates. But check out the directional arrows on the lead chart. Yields rose across the board until the Fed paused rate cuts.
Then the 10-year treasury yields paused along with the Fed. But the 30-year long bond yield continued rising.
Spending Is Out of Control
Howling at the Fed will not fix the problem. Spending is out of control, and Trump demanded more spending.
And the Fed cannot control spending, it can only react to what Congress does.
We cannot prove where long-term bond yields would be had the Fed listened to Trump’s carnival barking. But the chart itself suggests the logical answer.
Where to From Here?
The Fed is in a no win position. It’s very possible yields start plummeting. But if so, that will be due to falling demand and a slowing economy.
The next jobs and CPI reports will be telling. If the jobs report is bad, Trump blame Powell no matter what the CPI does.
I remain open to stagflation or a normal recession because none of us know what Trump will do or how the market will react to that.
But long-term, Trump has addressed nothing. So don’t expect to see zero interest rates again.
Risks to the Downside
I side with Powell and his newfound belief regarding downside risks to the labor market.
In fact, I have been harping about jobs for quite some time, expecting the negative revisions that happened.
Payroll Disaster
On August 1, I discussed the Payroll Disaster, Jobs Rise 73,000 but Massive Negative Revisions
There were 258,000 negative revisions in May and June.
The labor market is much weaker than most economists realize.
For specific details discussion of why we know this. please see QCEW Report Shows Overstatement of Jobs by the BLS is Increasing
So, will rate cuts fix a weak labor market? We are about to find out, but my answer is no.
Meanwhile, please note that US Debt Now Grows by $1 Trillion Every 150 Days.
US national debt just topped $37 trillion and is growing fast.
Also, please see my August 23, 2025 post: What Do the Technical Charts Suggest about Long-Term Bond Yields?
“The supply must decrease or the demand must increase for 10-year bonds before the 10-year interest rate will fall.”
In an international framework, the above is paramount.
Not under the control of the Fed, are exchange rates. Foreign purchases of US debt are also undermined by a global sense that subsidizing the US (by buying its ever-inflating debt) is not rational, likely to be appropriated (eg Russia), and exacerbated by tariffs.
There’s actually a lot of history to the present day situation. This led to the 1951 Banking Accord. With post WW2, fixed 3.5%long rates and the Fed owning 90% of Tbills lead to inflation soaring, 15% plus,in the late 1940’s. Yield Curve Control in full force.The White House demanded the Fed keep rates low to “protect War Bonds”.
It’s an interesting history worth researching.
We may lead up to a similar Banking Accord in the future, like the past.
What’s old, becomes new again. Glass Steagall was instituted to prevent what happened in the 1920’s from happening again. At the end of the 1990’s boom, it was dismantled. Then came the financialized housing bubble, with Big Five investment banks given leverage waivers. Followed by the Great Recession.
Some analysts argue that in a highly developed and larger bond market today, the Fed’s buying power relative to market size may be insufficient to push long-term rates down substantially, limiting Operation Twist’s effectiveness as a standalone tool.
While it might provide some downward pressure on long-term rates, overall it is unlikely to be a powerful solution for 2025’s complex economic landscape dominated by inflation control, fiscal challenges, and labor market dynamics.
In conclusion, Operation Twist may have some utility but is unlikely to work significantly better or be a game changer in 2025 without complementary fiscal and monetary policies.
SEE;–> Trump ELIMINATE the Fed. on tap.
Means Trump will need to directly “control” mortgage rates to get out of the mess the Fed has created, not just get the Fed Funds rate cut a point or two. See a return to ZIRP. Zero Interest Rate Policy (ZIRP) from December 2008 through December 2015 still has a price it will pay. Rather, ZIRP will NOT be undone with whatever the Fed attempts next if it’s not ZIRP.
Meanwhile Mish ( thought you already forecast 4.8%) so Yes, the 10-year Treasury yield can still rise to around 5% even if the Federal Reserve cuts its short-term policy rate by a full percentage point. This disconnection happens because the 10-year Treasury yield is influenced by multiple factors beyond just the Fed’s federal funds rate:
Thus, a Fed rate cut of one full point does not guarantee a fall in the 10-year Treasury yield, which can still rise to around 5% or more depending on broader market and economic condition
Trump will soon have control of everything. The Fed, the government, the courts, economic policy, etc etc. He is approaching “absolute power”. And absolute corruption.
As always, I can’t change this. But I can position myself to take advantage of it.
Thank you for your attention to this matter.
The president controls the government, including Congress, if he controls the House & Senate. That’s the way it’s ALWAYS BEEN. Nothing has changed. Brandon exerted enormous control over policy decisions during his FAILED four years.
The president controls economic policy, ALWAYS HAS.
The Fed has never been a fully independent. Powell’s term is up in May, so Trump will not be breaking any precedent by appointing someone who’s aligned with his economic policy. Every president ALWAYS made this choice.
As for the courts, I certainly hope SCOTUS reigns in activist liberal judges. Again, the courts are a MAJOR problem. BTW, I’m fine with the court reigning in cutting both ways. However, it’s funny how there seems to be far fewer cases of liberals wailing about activist conservative judges. Why is that, PapaD?
Nice job co-opting Trump’s tagline.
And as for absolute power corrupts. I agree 100%.
Joe Biden ALLOWED Mayorkas to completely ignore US immigration law & allowed at least 10M illegals to stream across the border. This has gotten hundreds of Americans killed over the last 5 years.
Killed as in dead, never coming back, in the ground forever.
Trump’s policies ARE NOT getting Americans killed, quite the opposite, I would say.
IMO, inflation would go wild again if Trump had control of interest rates,
Not with a Trump loyalist in charge of the BLS!
That is correct, Just change the numbers to what he wants to hear!
And in new Trump breaking news:
Look out Canada, Greenland and Mexico! You are about to get taken over…
But then who would we impose tariffs on? OH that’s right, tax em for the costs of the invasion by the department of WAR!
Great idea, Hegseth! Kuddos!
“Trump Proposes Renaming Department Of Defense”
Restoring the department to it’s original title, instead of the innocuous sounding DOD. The Korean War came to be called a police action, to downplay the fact that it was a war. The Vietnam War was also downplayed, authorized by a congressional resolution on the Gulf of Tonkin incident, instead of a declaration of war. Neither of these wars were in the defense of the United States.
Why not Department of Offense? Seems to capture the spirit.
I’ve used that in past comments over the years!
“If President Trump gained control of Fed policy, monetary decisions would cater to short-term political goals rather than the long-term stability.”
America will be almost $39T in debt by the end of CY 2025, per the Treasury’s own forward guidance. At this point, all Trump, Powell or anyone else is doing is trying to delay the coming financial implosion. The FAIR Act to eliminate interest on reserves or the Fed’s similarly proposed Supplemental Leverage Ratio elimination are attempts to free up $3.3T in reserves.
Everything anyone is doing is just a gimmick at this point. The only question that remains is how soon does the Fed implement YCC through sustained QE? They’re trying to go back to pre-2008 means of monetary policy which let them do constant QE through SOMA purchases.
As such, there is NO LONG-TERM STABILITY!
To even suggest there’s a path to stability is laughable. The Perfect Storm arrives sometime in the next 24 months.
Bessent has already bought bonds when yields hit 5%+. YCC is already here.
Inflation is a number they decide. not reality. Anyone that goes to a grocery store understands that.
I agree. Once they pulled back on QT, YCC started back. The Fed has been buying tens of billions of Treasuries since this spring. However, the scale will change radically, if they stop paying reserves.
Yes, it is always just around the corner, any minute now…
With $2T annual deficits, the next recession has been getting pushed out further & further. No surprise there.
The problem, of course, is that all of this deficit spending is going will continue to prop up the economy, until it doesn’t.
We’ll either have a recession in 2 years due to Trump’s policies, or they will slowly start to rebuild the economy with a stronger labor market.
But what is immutable is our looming financial debt crisis. A real recession is going to blow the doors off, considering how much debt we’re in.
It’s starting to look very stormy. Whether or not that leads to Hurricane Katrina in the next 2 years is hard to say, but I wouldn’t bet against it.
You should look online at a legitimate source for how the Open Market Operations (OMO) process works by the Fed.
Yes, the Fed has used OMO to keep both inflation and unemployment low as part of its ‘dual mandate’ since at least the Federal Reserve Reform Act of 1977. And yes, it’s continuing to do so.
That is NOT “constant QE” (no matter what some conspiracy site tells you). If the Fed wants a lower overnight Fed funds rate, it does buy bonds thru OMO to lower that rate (even that’s NOT QE). But when the Fed wants to raise rates, as it has most recently, it sells those same bonds (so definitely NOT QE).
If the Fed wants that overnight rate to stay the same, it basically maintains its current level of holdings of short-term bonds. As some mature every day, it buys back an equivalent amount to keep the overnight rate steady. That is NOT QE and is not buying any new debt issued by the US Treasury on behalf of Congress (that actually runs the government checkbook)
Just trying to help you understand something you are confused about. Because when you write obviously incorrect statements as fact, your opinions won’t be taken as seriously
The Fed could cut short term rates and longer rates could go up. That’s what happened last fall. Usually, though, when the Fed cuts, longer rates follow. Maybe that’s just because the market sees the same inflation and economic data that the Fed does. Maybe it’s because bond traders see their own herd behavior and expect bond value appreciation. Trump may or may not understand this. The problem is the deficit. Some of the tax cuts should have been allowed to expire. The jump in military spending is obscene, even with the grave threat posed to America from Venezuela with their arepas.
One of Trump right hand veins caused a blood stain.
PLease provide the sources for this statement
Howling at the Fed will not fix the problem. Spending is out of control, and Trump demanded more spending.
SO how does Wash DC lower interest rates for mortgages, loans? These appear to be more important to voters
Rein in the budget deficit with a combination of spending cuts and revenue increases. We just need to elect a conservative as President to lead the charge instead of a socialist/populist.
Spending “should” be juiced, and jobs should be up, if the laws of economics still held. The Big Beautiful Bill had huge tax incentives surrounding depreciation and R&D expensing that should stimulate hiring immediately. Further, there are fee and regulatory provisions that should discourage the hiring of immigrants and increase the hiring of US citizens, and that may also contribute to an additional very small drop in unemployment. In other words, it ispossible that inflation will regain the upper hand over jobs in the FOMCs next decision.
You may not have “liked” what I said, but the arguments are sound. Unfortunately, economics is primarily about “feelings” now, rather than the logical outcome of incentives.
What you seem to be missing is the fact that uncertainty rules our economic picture and the vast majority of businesses are curtailing expansion and hiring. There is a glut of new homes on the market, inflation and job losses occurring across many sectors as AI boots workers to the curb.
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If only we knew how this admin’s backers are really positioned…. But we don’t fully know who they are and I doubt they disclose their holdings anywhere even if obligated legally.
Will this admin twist the USD to oblivion? Or force a liquidity crisis to pull the rug from under USD-borrowing nations so the admin’s backers to buy those nations’ assets at a discount?
For 40 years, the financial system has become more fragile. Each admin paints us further into a corner of a kitchen on fire. Is there a fire extinguisher or is there only a trap door just large enough for insiders?
All this ridiculous power grab is going to come back and haunt dimwitted republicans when dems take power. It is going to be hilarious to watch from afar.
How will that manifest itself? Please elaborate.
The better question is, how could “the president can decree laws like a king” POSSIBLY go wrong?
You miss Kamala.
A better headline: Trump Does Not Understand Anything
Yet he holds the reins of power.
Stupid people voted for stupid representation.
People in the middle of the country voted against a DEI coastal elite who couldn’t wow them with her intellect. Neither party can produce worthy Presidential candidates.
And yet they were wowed by Trumps! LOL! Maybe the problem is the people in the middle of the country?
Deplorables?
Worse… Dipshits.
A better headline: Agent Krasnov Does Master Putin’s Bidding
He who holds the kompromat calls the shots.
I do think that central banks can and have controlled long term rates. Buying long bonds and mortgages and expanding the balance sheet is an example. Also, Japan is an example.
I believe the Fed will keep long rates lower than market by purchasing bonds and that together with government, they will depreciate the dollar.
Running inflation (actual – not reported) higher than interest rates and depreciating the dollar is the best way to avoid a debt crisis. Maybe not forever but long enough for those in power to out live the problem.
It’s my understanding that this is how the WW2 debt was dealt with.
If they lower the rates and buy long term bonds they can control for a while.They have done it already.
Dollar is going down anyway,because they have to print to keep the system alive.
Lowering the dollar gives you relief on the debt:you pay back bond holders with a weeker dollar.
If money (capital) were tight, the shorter treasury bill curve would likely look similar but the one year bill our to three years would be higher. What’s going on? Demand for capital from the banking system is weak. Hmmm…Is the Fed providing too many reserves?
Since the yield curve is the purest presentation of demand vs supply, it seems our of sync with the targeted FF rate.
The IOR rate exceeds NIMs.
From The Economic Fractalist (TEF) .. Mish Talk is the listed #8 Macroeconomic Blog in the world (and for good reason).., TEF is #7 … ( MT is better, but TEF has the appeal of a self-assembly mathematical order to the global macroeconomic system). … With the {bond} market (and the Fed following) creating lower interest rates, a 119 day (growth rebound is expected (from the 25 Sept 2025 low) with a final crash of 15-21/22 days (and) with a low in March/April of 2026.
What moron would trust a blog that cross posts into the comments of other blogs? Please let me know, I have a bridge to sell them.
My bond proxy, the 24-month moving average of the 24-month roc in money flows shows that rates will stay too high next year. That said, rates will come down in the last part of the 1st qtr. in 2026.
I predicted AAA bond rates by 1 basis point in 1981.
N-gNp was propelled to 19.2% in the 1st qtr 1981, the FFR to 22%, and AAA Corporates to 15.49%. My prediction for AAA corporate yields for 1981 was 15.48%.
Why do people continue to insist on pointing out that Trump doesn’t know much or that he continually conflicts previous statements he has made?
It doesn’t matter. Trump and his core base don’t care and Trump will not generally modify his policies, except perhaps if the stock market were to take a massive swan dive.
We are entering the throes of a command economy and credit allocation.
Lori Logan: “So, I believe bringing reserves down gradually, while also making our ceiling tools available and encouraging market participants to use them when they are economically attractive, will be an effective strategy in the United States.”
Logan’s right. Drain reserves while lowering policy rates. The 1966 Interest Rate Adjustment Act is prima facie evidence.
Opening remarks for panel titled ‘Post-Pandemic Challenges for Monetary Policy Implementation’ – Dallasfed.org
In the U.S., repo rates have averaged about 8 basis points below interest on reserves in recent months. That tells me we have more room to reduce reserves.
Bagehot: save intel.
The FED’s actions are perverse. The FED’s policy rates didn’t become penalty rates until 2002 when deflation was pervasive in the GFC.
Prof, the Fed short bank accounts in Oct 2008. Instead of returning the money Yellen cont to short in order to cut the frontend to zero and the long duration. For the first time the Fed had the power to control both the front end and the long duration. Yellen was paying negative rates to bond holders. The federal debt rose from $12T in 2010 to $23T in 2019: 9Y x $17T x (-)2% ==> (-) $3T.
The problem with the Fed is it has become political just like the courts. Instead of ruling by the law, the lower courts like to make up jurisdictions and apply new judicial concepts and get struck down by the Supreme Court. The Fed is doing the same thing when the FED ignores the market. Interest rates are a market function and not a function of the FED. The Fed should only follow the market. The Fed function is to hand out liquidity when needed to be the lender of last resort. The Fed gets into trouble when it becomes “Data Dependent” and does not follow the market. 1) We see the problems when the Fed refused to raise interest rates when the market sniffed out inflation 6 months prior and was blatantly ignoring the data. 2) We see an issue when the FED lowered rates before the election. They had to know this was prejudicial at best and would be viewed as political. 3) The insider trading at the Fed is rampant and has never been dealt with. This looks like the economic equivalent of the USAID. It is time to clean the house just like the BLS. I don’t want the next democratic president to play with the interest rates, but I don’t want the Fed in its current configuration. The biggest issue is “interpreting” (politicizing) data that is lagging with interest rate decisions that have lagging effects. Structurally faulty by design and needs to revamp to a 21st century high velocity of money moving model. Design should be 25 basis points plus or minus the markets’ two-year treasury yield. No data interpretation, just the banker’s bank.
Thanks for your opinion, but the Fed has a Congressionally mandated charter. And it’s NOT to “follow the market”.
Don’t like it? Talk to your Congressman about revoking the Federal Reserve Reform Act of 1977 which gave the Fed its infamous ‘dual mandate’
Trump is just asking for what all Presidents want–wind at their backs and in their sails, especially when neither party has curtailed spending. Oh the standard commenters say the same thing but each time I remind them of what the FFR was from 2008 onward. Did Obama have to ask for 0? No, he got ZIRP his entire 2-term presidency less one month. Biden about 30% of the time. Trump got it in his final 9 months thanks to Covid. Was Obama the same idiot as Trump? Biden? Or are they just being lazy politicians.
I would just say to President Trump be careful for what you wish–if rates move lower it’s because the Fed fears labor and the economic picture is gloomier than their (fractured) view of inflation. If rates persist where they are it means inflation has not abated. If they move higher on the short end inflation has weighed anchor again. And in general with debt at 37 Trillion and counting, even rates nearer 0 don’t do much without restricted spending.
We have a bipartisan economic mess. But I’m sure glad of the cultural shift that occurred after 2024’s result. Borders, bathrooms, and classrooms are in far better shape. Streets being addressed.
I would not be surprised in the least if the revenue from Tariffs was used to conduct a another ‘Operation Twist’.
This time the goal would be to buy up the existing 10 year bonds that were issued a few years ago that are paying nothing (ie those 0-2% bonds) since they will now be for sale at a below par price (this in effect is a legal way to default on repaying full value). Doing that means those bond holders are now free to invest the money in the newest issued bonds which will drive demand which is what’s needed to lower the 10 year rate.
“bondholders are now free to invest the money in the newly issued bonds”? They can already do that if they want to, so they must currently not want to do that.
So you think it’s a good idea for the US government to ‘retire’ bonds paying 0-2%? And with what money (we’re in a continual deficit)? It would need to borrow money (at the current and rising higher interest rate) to do so. THIS is the problem with Trump trying to mess with the Fed’s Congressionally mandated endeavors.
It was a bad idea for the Fed to try this, but at least they did it in the aftermath of the Great Recession, the worst downturn since the Great Depression. What’s Trump’s (legitimate) excuse going to be?
I explained with what money. The tariff money which is not DEBT but rather income so it would require no borrowing. The other choice is to put that tariff money in general revenues and let it get spent rather than retiring debt. Which would you prefer?
Yes, Bondholders can currently sell their 0-2% bonds. But they must do so at a loss (below par) since new bonds are paying 4+% so no one is giving face value. In order to entice them to sell it’s just a matter of pricing it right (still below par but slightly above market rate). The upside for the US debt (and us tax payers) is that you can buy $1 of debt back for like 85-90 cents so we cut the overall debt AND save years of paying interest.
You lost me. Where does the government get the money to pay for all its spending? It will spend $1.9 trillion more than it collects in both 2025 and 2026.
Trump could use a basics economics course. However, his cadre says he doesn’t read anything but reacts.
Where are the clusters. In Sept/Oct 2024 all rates were tangled together, going up in unison. In Aug 2025 they are breaking apart, tilting down. The 5Y and the 2Y might breach Sept 2024 low first, forming a new cluster. Please, bring the clusters back.
Nixon tried playing this same game with Arthur F. Burns in the 1970s. It ended very badly. No reason to believe a similar outcome won’t happen today.
We don’t need to see charts to know Trump has no idea about these issues. He’s just a carnival barker in this spectrum
Trump is turning the US into a banana republic..if he is ever allowed to control interest rates the transformation into a banana republic will be complete.
ETA May 2026
“Banana republic with nukes.”
And no bananas.
Banana flavored nukes maybe?