The US Treasury’s Backdoor Stimulus Is Hampering the Fed
NEW YORK – The US Federal Reserve has moved mountains to control inflation, which in July fell below 3% for the first time since 2021. Unfortunately, the Fed finds itself working at cross purposes with the US Treasury, whose debt-issuance strategy has been providing backdoor interest-rate cuts, keeping inflation above the Fed’s target range.
By shortening its issuance profile to reduce long-term interest rates, the Treasury has delivered economic stimulus equivalent to a one-point cut in the Fed’s policy rate. Moreover, forward guidance in the Treasury’s latest quarterly refunding announcement indicates that this backdoor quantitative easing (QE) will continue to frustrate the Fed’s own efforts and compromise its functions.
Typically, the Treasury aims for 15-20% of outstanding debt to be in short-term bills, with the rest in intermediate- and long-term debt, called coupons. But this share has risen and remains well above any reasonable threshold: as much as 70% of new debt raised over the last year came from short-term bills, pushing the total well above 20%.
Such an excessive reliance on short-term debt is generally reserved for times of war or recession, when markets are fragile and financing needs spike. Yet the past year has been one of buoyant equity markets, above-target inflation, and strong growth. Investors understandably have begun to question whether the Treasury’s issuance strategy is still “regular and predictable,” and lawmakers such as Senators Bill Hagerty and John Kennedy have taken notice and begun to confront Treasury Secretary Janet L. Yellen over the issue.
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