Interest Rates

Since the start of the year, longer-term interest rates have fallen a bit—both the 10-year and 30-year Treasury yields have dropped by between 20 and 30 basis points. This drop came after rates rose in the aftermath of Trump’s election, potentially because markets anticipated looser fiscal policy (extension of the Trump tax cuts) to lead to tighter monetary policy (the Fed becoming more cautious about lowering rates). 

Josh Barro poses two theories on why rates have declined. The first explanation is that the combination of DOGE and the budget resolution passed by Congress is likely to reduce spending by more than previously expected, and this anti-inflationary fiscal conservatism will enable the Fed to lower interest rates more quickly than previously thought. The second theory is that demand for capital has fallen as economic growth expectations have declined.

Barro notes that these theories are not mutually exclusive, and that both could have merit. However, he points out the the S&P 500’s recent fall is more indicative of the impact of tariffs and recessionary fears, as reduced inflation and lowered interest rates would, other things equal, be expected to boost markets.

It remains to be seen whether the pro-growth potential of deficit reduction and deregulation will outweigh the costs and uncertainty imposed by tariffs. For now, as Barro observes, President Trump appears  more determined to impose far larger tariffs than he was during his first administration.

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This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. This material has been prepared for informational purposes only, and is not intended to be or interpreted as a recommendation. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice.