President Donald Trump's unprecedented and intensifying attacks on the Federal Reserve risk backfire by hitting financial markets and the economy with higher long-term borrowing costs.

For weeks, he has been slamming Chairman Jerome Powell for not significantly cutting interest rates to stimulate the economy and as Trump sees it lower the government's debt bill.

He has nominated the head of his Council of Economic Advisers to the central bank's board and is now seeking to oust Governor Lisa Cook, paving the way for a legal battle over the institution's political autonomy.

Yet, despite all the Fed's power over short-term interest rates, it is the 10-year Treasury yield—set in real time by traders around the world—that largely determines what Americans pay for trillions of dollars in mortgages, business loans, and other debt.

And although Powell has signaled that he is ready to begin easing monetary policy as early as next month, those rates remain high for another reason: Rates threaten to exacerbate persistently high inflation; The budget deficit is poised to continue flooding the market with new government bonds; and Trump's tax cuts may even provide a stimulus boost next year.

Add in concerns that a Fed loyal to the president could cut interest rates too far, too fast, jeopardizing the central bank's credibility in fighting inflation, and long-term interest rates could end up higher than they are now, depressing the economy and potentially destabilizing other markets.

"The combination of weaker US payroll growth and the White House's baiting of the Fed, both institutional and private, is starting to create real problems for investors in US Treasuries," said David Roberts, head of fixed income at Nedgroup Investments, who expects long-term interest rates to rise even if short-term rates fall. "Inflation is running well above the Fed's target. Much cheaper money now is likely to trigger a boom, a weaker US dollar, and much higher inflation."

The pressure on long-term interest rates isn't limited to the US. Long-term rates have been propped up in the UK, France, and other countries by investor concerns about the same combination of high government debt burdens and increasingly unpredictable politics.

But the crosscurrents of Trump's return to the White House have presented their own challenges.

During last year's presidential campaign, as investors began betting on his victory, 10-year Treasury yields rose sharply even as the Fed began pulling back its benchmark interest rate from a more than two-decade high. This was because investors anticipated that the Republicans' tax-cutting and deregulation agenda would add fuel to what, at the time, was a surprisingly resilient economy.

Since Trump took office, however, the Fed has held off on policy as his unpredictable trade wars upended the economic outlook, spooked foreign investors, and threatened to raise consumer prices. When Trump's tariffs in April triggered one of the worst bond selloffs in decades, sending yields soaring, Trump halted them, saying the market was "getting a little nervous, a little scared."

Since then, he has reimposed import levies and his trade policy has continued to fluctuate. At the same time, his tax-cutting bill will add more than $3 trillion to the deficit over the next decade, which will add to the debt pile unless the tariffs are maintained by subsequent presidents and eventually generate enough revenue to offset the costs.

"The U.S. will have to issue significant amounts of debt to cover its deficit," said Michael Arone, chief investment strategist at State Street Investment Management. He said the debt burden adds to concerns about growth and inflation. "As a result, I expect long-term interest rates to remain higher and more volatile than the market expects." (alg)

Source: Bloomberg