The Fed's "Third Mandate" Debate: Is Trump Interfering with Interest Rates?

For generations on Wall Street, the Federal Reserve's "dual mandate" of "price stability and full employment" has been the fundamental principle guiding its interest rate policy. Former and current Fed chairs, like Alan Greenspan and Jerome Powell, have repeatedly emphasized this principle.

However, when Stephen Miran, President Trump's recent nominee for Fed governor, proposed a "third mandate" – that the Fed should also pursue "moderate long-term interest rates" – discussions ignited in the bond trading department, and analysts competed to analyze the motivations behind the move.

Surprisingly, Miran did nothing more than fully quote a clause from the Fed's charter that had long been ignored. But for market veterans like Andrew Brenner, vice chairman of Natalliance Securities LLC, the impact on financial markets is clear and startling – it could upend existing investment portfolios.

Brenner believes that Miran, known for the "Mar-a-Lago Accord" and recently taking office at the Fed, chose to refer to the "third mandate" in a congressional hearing, representing the clearest signal yet that the Trump administration intends to use monetary policy to influence long-term Treasury yields, cloaked in the central bank's charter.

This also highlights that Trump, in his pursuit of goals, is willing to break decades of institutional norms and undermine the Fed's long-standing independence.

Brenner wrote in his September 5 report: "The Trump administration has found this vaguely defined clause in the Fed's original documents, giving the Fed greater influence over long-term interest rates. While this is not the main line of trading at the moment, it is definitely worth being cautious about."

To date, these policies have not taken effect, and there is no need for implementation in the near future, as the deteriorating labor market in the United States paves the way for a new round of interest rate cuts by the Fed, and US Treasury yields of all maturities have approached their lowest levels of the year. In addition, the "third mandate" has in recent years been seen as a natural consequence of the Fed's management of inflation, not as an independent goal.

Nevertheless, some investors say that the intense focus on long-term interest rates is enough to include the possibility of "political intervention" in their bond market strategies. Others warn that if managing long-term interest rates through unconventional means becomes part of the policy, it could lead to negative effects (especially pushing inflation higher), making debt management and the Fed's work more difficult.

Although the setting of the Fed's short-term interest rate targets often attracts attention, it is the yields on long-term Treasury bonds, which are priced in real-time by global traders, that determine the actual costs of many Americans' trillions of dollars in mortgage loans, corporate loans, and other debts.

U.S. Treasury Secretary Baint has repeatedly stressed the importance of long-term interest rates to the U.S. economy and housing costs. Similar to Miran, he recently referred to the Fed's "three statutory goals" in an op-ed in the Wall Street Journal, while criticizing the central bank's "mission creep."

Lisa Hornby, head of U.S. fixed income at Schroders, said in a Bloomberg Television interview: "This is obviously a high priority for the government, because they want to stimulate the housing market."

George Catrambone, head of fixed income at DWS Americas, believes that if long-term bond yields remain high after several interest rate cuts by the Fed, it could trigger policy intervention.

"Whether it's led by the Treasury Department and coordinated with the Fed, or vice versa, they will always find a way, and this response mechanism is bound to start," Catrambone said. In recent months, he has rolled maturing short-term Treasury bonds into 10-year, 20-year, and 30-year long-term Treasury bonds, admitting that "this position goes against market consensus."

The means currently being discussed in the bond market that could be used to lower or at least manage long-term interest rates include: the Treasury Department issuing more short-term Treasury bonds and increasing purchases of long-term Treasury bonds; a more radical move would be for the Fed to resume quantitative easing (QE) to buy bonds – although Baint has detailed the negative effects of previous QE, this Treasury Secretary also supports the use of QE in a "real emergency"; another possibility is for the Treasury Department to cooperate with the Fed to absorb long-term government bond issuances through the balance sheet.

Regardless of how low the current probability is, the expectation of the "ultimate buyer intervening to manage interest rates" at least marginally increases the risk of shorting long-term government bonds.

Daniel Ivascyn, chief investment officer at Pacific Investment Management Company (PIMCO), said: "If the Fed, whose independence has diminished, decides to resume QE, or if the Treasury Department intensifies its efforts to manage the yield curve, shorting long-term government bonds would result in heavy losses." This bond giant is currently still under-allocating long-term bonds, but has begun to realize profits from "bets on short-term bonds outperforming" positions – this type of position has contributed significantly to the outstanding performance of its fund this year.

Lessons from History: The "Third Mandate" Only Applies in Times of Crisis

This is not the first time the U.S. government has sought to lower long-term interest rates, the most typical being during and after World War II. In the early 1960s, the Fed launched "Operation Twist," which aimed to lower long-term interest rates while maintaining stable short-term interest rates.

At the height of the global financial crisis, the Fed launched a large-scale asset purchase program (initially buying mortgage-backed securities, and then expanding to government bonds) to lower long-term yields and stimulate the economy. In 2011, the Fed launched a new version of "Operation Twist." However, these early QE volumes pale in comparison to the scale of bond purchases by the Fed during the COVID-19 pandemic.

Gary Richardson, an economics professor at the University of California, Irvine, and a Fed historian, said: "It's true that what Trump wants to do, the Fed has actually done in the past, and Congress has also allowed it, but these actions mainly occurred during wartime or economic crises. These reasons are not valid now - we are not engaged in a large-scale war, and we have not experienced a crisis at the level of the Great Depression, Trump simply wants to do it."

Risk Concerns: Intervention Under High Inflation May Backfire

Institutions such as Carlyle Group warn that the Treasury Department and the Fed, under inflation that remains sticky and above targets, may backfire if they more actively lower long-term interest rates. Previously, market expectations that the Trump administration would introduce more economic stimulus caused 10-year U.S. Treasury yields to rise to a high for the year of 4.8% in January of this year.

A fundamental question lies in that the definition of "moderate long-term interest rates" is vague and unclear. Bloomberg data shows that the average yield on 10-year U.S. Treasury bonds since the early 1960s has been 5.8%, and the current level of around 4% (even the high at the beginning of this year) is much lower than this average. From a historical standard, it seems that there is no need to take unconventional policies.

Mark Spindel, chief investment officer at Potomac River Capital, who co-authored the book "The Myth of Independence: How Congress Controls the Fed" with Sarah Binder, said: "It is difficult for me to define 'moderate' with a specific number, but the current level (of long-term interest rates) is like 'Goldilocks' - not high or low, just right."

Spindel believes that the vague expression "moderate long-term interest rates" makes it almost usable "to justify any policy." He revealed that he is buying short-term Treasury Inflation-Protected Securities (TIPS) to hedge against the risk of the Fed losing its independence: "Hold Treasury Inflation-Protected Securities in case the Fed becomes a political tool."

Debt Driver: $37.4 Trillion in Government Debt Presses, and Low Interest Rates Have Become a Necessity

As government deficits soar, lowering interest rates across all maturities helps reduce rising debt financing costs. Bloomberg data shows that as of September 9, the size of the U.S. government debt has reached $37.4 trillion. The recently passed budget law extends the tax cuts passed by Trump, and the ratio of the U.S. fiscal deficit to GDP is expected to remain at a high level of more than 6%.

Baint imitates former Treasury Secretary Janet Yellen, by increasing short-term Treasury bond issuances on the one hand, and maintaining long-term Treasury bond issuances stable on the other, while indicating that "issuing long-term Treasury bonds at current yields is not the best option for taxpayers."

Vineer Bhansali, founder of LongTail Alpha, said: "Debt and debt service costs have become a constraint on the government, they are powerless at the fiscal level and cannot do anything about it, so they can't do anything but resort to the Fed - this is the only way out. The Treasury Secretary's push to lower long-term interest rates has now become routine."

Bhansali added that the Trump administration is willing to take this risk for those who fear accelerating inflation: "The Fed will eventually have to cooperate with the president and the Treasury Department, even if inflation is higher than that."