Treasury Secretary Questions Fed's Rate Policy, Cites 3.76% Yield

The U.S. Treasury Secretary has publicly questioned the Federal Reserve's judgment on interest rates, asserting that the two-year Treasury yield indicates that the benchmark interest rate is too high. The Federal Reserve has set the target range for the federal funds rate at 4.25% to 4.5%, while the two-year Treasury yield has fallen to around 3.76%. This discrepancy has led to speculation that the Federal Reserve may need to reconsider its monetary policy stance.

The Treasury Secretary has repeatedly emphasized that their comments are solely based on past monetary policy and do not reflect current or future policy decisions. However, they have consistently maintained that the two-year Treasury yield is signaling that the overnight rate is too high. This perspective suggests that the Federal Reserve's current interest rate policy may be too restrictive, potentially hindering economic growth.

The Treasury Secretary's remarks come at a time when the economic landscape is uncertain, with various factors influencing market sentiment. The Treasury Secretary also touched on other economic issues, including the potential impact of tariffs on the economy. They stated that the 20% tariff on Vietnam, which was announced by the previous administration, would not be added to the existing 10% tariff. This clarification aims to provide some stability to businesses and investors who have been navigating the complexities of international trade policies.

The Treasury Secretary's public criticism of the Federal Reserve's interest rate decisions highlights the ongoing debate within the economic community about the appropriate level of interest rates. While the Federal Reserve has been cautious in its approach, the Treasury Secretary's comments suggest that there may be room for adjustment. The market will be closely watching the Federal Reserve's next moves, as any changes in interest rates could have significant implications for the economy.

When asked about the possibility of reducing interest rates by three percentage points, as suggested by the U.S. President, the Treasury Secretary did not provide a direct answer. Instead, they reiterated that the market is signaling a need for rate cuts and added that during the first term, the President was more accurate in timing rate cuts than the Federal Reserve.

The Treasury Secretary also addressed the call for the resignation of the Federal Reserve Chairman by a government housing finance regulator. They declined to comment directly but suggested that the Federal Reserve should control its spending like other institutions. The Treasury Secretary hinted that they hope the Chairman will leave the Federal Reserve system entirely by next May, although the Chairman's term as a governor extends until 2028. The Treasury Secretary mentioned that there are many qualified candidates who could replace the Chairman and that two positions will likely be filled next year.

The Treasury Secretary noted that there are clear disagreements among Federal Reserve policymakers, particularly between those appointed by the current administration and those appointed by previous administrations. This division is evident in the so-called dot plot, which shows the Federal Reserve officials' predictions for future interest rate paths. The Treasury Secretary did not elaborate on the implications of these disagreements but suggested that they are worth considering.

Regarding the federal debt, the Treasury Secretary mentioned that the upcoming legislation will include an increase in the federal debt ceiling. They stated that the additional 500 billion in debt capacity should be sufficient until 2027. The Treasury Department has been using special accounting measures to meet federal payment obligations without breaching the debt ceiling since January. Once the legislation is signed into law, the Treasury Department is expected to increase the sale of short-term debt to replenish its cash reserves.

The Treasury Secretary also discussed the broader debt issuance strategy, mentioning that the two-year Treasury yield, which indicates that the overnight rate is too high, will be considered. However, they did not provide specific details on how this will be addressed. They emphasized that the debt management process is well-organized and methodical but acknowledged that these considerations will be taken into account. The Treasury Department's next quarterly refunding announcement, expected on July 30, will provide more information on any changes to the issuance strategy.

When asked about the White House economic advisor's claim that the administration's policies will reduce the federal deficit by 1.1 trillion over the next decade, the Treasury Secretary declined to comment. They acknowledged the difficulty of predicting federal borrowing a decade in advance due to various uncertainties but expressed confidence that the current direction is correct.