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Treasuries: The Fed’s costly growth reflex The Federal Reserve is part of America’s fiscal problem. It should be part of the solution, not by financing deficits, but by recognising that stronger growth need not mean higher inflation. The data offer grounds for that distinction: trimmed-mean PCE inflation at 2 %, food-at-home CPI inflation at 2.1 %, below its long-term average, rising productivity and solid employment. These look like the green shoots of Trump’s supply-side agenda: growth supported by expanding capacity rather than simply stronger demand. Rate-sensitive sectors are hurting. AI infrastructure and reshoring investment tell a different story. Treating these divergent forces as one overheating economy mistakes productive investment for excessive demand. The fiscal consequences are substantial. Federal interest costs now exceed spending on either defence or Medicare. Marketable Treasury debt carries an average rate around 3.4%, while maturing coupon debt faces refinancing rates roughly 1.4 percentage points higher. Nearly $7 T of Treasury bills mature within a year. Another 75-basis-point Fed increase would add approximately $50 B to their annual interest cost alone. The danger is circular. Higher rates widen deficits, requiring more borrowing. Greater long-dated issuance can lift term premiums, raising borrowing costs again. Interest payments absorb resources without expanding productive capacity, potentially crowding out investment. The Fed cannot repair Washington’s budget. Nor should fiscal pressure dictate monetary policy. But unnecessarily restrictive rates can compound the problem. It needs to signal that it understands supply-side economics. Demand exceeding capacity raises prices; greater capacity and productivity can restrain them. Growth is not the enemy. For investors, escalating debt service threatens long-term yields. Less inflationary growth points the other way. With Treasury shorts at extreme levels, according to Bloomberg, the bearish trade looks crowded. Bonds deserve selective buying. The Fed should become part of the solution by welcoming productive growth, not making it needlessly expensive to finance.

DrJStrategy ↗