Trump wants to cut deficits. Powell-bashing, stablecoins, and T-bills could help.

Mint

4 days ago

President Trump has been waging a campaign to oust Federal Reserve Chair Jerome Powell.
What do President Donald Trump's campaign to oust Federal Reserve Chair Jerome Powell, legislation to regulate digital stablecoins, and the Treasury's debt-management practices have to do with one another?
All relate to holding down the rise of the interest cost on federal government debt, a major factor boosting the budget deficit from the recently passed Big Beautiful Bill.
Trump recently posted on Truth Social that if the Federal Reserve would slash its key federal-funds policy rate, now set in a range of 4.25% to 4.5%, by multiple percentage points, it could save the government billions in interest costs.
The yield on Treasury debt has turned higher as notes from the near-zero-interest-rate eras following the 2008-09 financial crisis and the Covid pandemic mature. They will be replaced with notes yielding nearly 4% or higher.
It's true, T-bills could be sold at lower rates if Powell & Co. would acquiesce to Trump's wishes. Meanwhile, BNP Paribas rate strategists Guneet Dhingra, Sebastian Mauleon, and Timothy High wrote recently that the Treasury should take a 'T-bill and chill" tack.
That would produce a 'significant cost saving" for the Treasury. It wouldn't reduce the deficit, but it would reduce the government's interest expense, which is already running at over a $1 trillion annual rate and exceeding the U.S. military budget, as I've noted previously.
The Treasury has kept T-bills to about 15% to 20% of its total issuance, but the BNP strategists argue that the department should think about upping that to 20% to 25%. Demand from money-market funds and overseas investors (buyers of some $336 billion of bills in the latest 12 months) should absorb the increased supply. Fewer notes and bonds, they note, should tend to reduce intermediate- and long-term yields.
Former Treasury Secretary Janet Yellen was criticized for tilting the government's securities sales toward shorter maturities starting in late 2022. One of those critics was Scott Bessent, her successor, who hasn't changed the Treasury's financing mix since taking over this year.
However, Powell has said that the Treasury's financing costs don't enter into the Fed's interest-rate decisions. This past week, Kevin Warsh, widely viewed as a candidate to replace Powell, posited that the Treasury and Fed should coordinate their debt-management policies. 'We need a new Treasury-Fed accord, like we did in 1951 after another period where we built up our nation's debt and we were stuck with a central bank that was working at cross-purposes with the Treasury," he told CNBC.
Tilting Treasury borrowing to the short end is 'stealth QE," according to Dario Perkins, managing director for Global Macro. Quantitative easing describes central bank buying of securities to inject liquidity into the financial system. The idea behind QE is to reduce the supply of long-term government paper available to investors and force them to buy corporate and mortgage debt to stimulate the economy, as former Fed Chair Ben Bernanke explained back in 2010.
QE has mainly served to boost financial markets, Warsh said, as the S&P 500 index and Nasdaq Composite hit records again last week, corporate credit spreads historically narrowed, and initial public offerings picked up. On Main Street, however, credit is tight, owing to the level of short-term rates. (Small businesses borrowing from banks typically pay some spread over the posted prime rate, currently 7.5%.)
Now comes the crypto connection to all of this. The passage this week of the so-called Genius bill sets standards for stablecoins, which are digital currencies pegged to the dollar or another actual currency. Stablecoins would have to be fully collateralized by safe assets, notably U.S. government debt.
That would boost demand for Treasury bills, Torsten Sløk, Apollo Global Management's chief economist, wrote recently. He cites a recent Bank for International Settlements paper that estimates that an aggregate $3.5 billion flowing in stablecoins lowers the three-month T-bill rate by 2.5 basis points in 10 days and five basis points in 20 days. (A basis point is a hundredth of a percentage point.)
Circle July 30 on your calendars to see how these disparate forces come together. The Treasury is due to announce its quarterly financing plans that morning, while the Federal Open Market Committee will announce its rate decision that afternoon, followed by Powell's news conference.
The fed-funds futures market on Friday puts a 95% probability of no interest rate change then, according to the CME FedWatch tool, but Fed Gov. Christopher Waller late on Thursday argued for a quarter-point cut then. That may make him the new front-runner in the race to replace Powell, says Washington watcher Greg Valliere, chief U.S. policy strategist for AGF Investments, although he trails Warsh, Bessent, and Kevin Hassett, head of the National Economic Council, in the Polymarket betting.
Speaking for the likely majority, Fed Gov. Adriana Kugler this past week said no rate reduction is appropriate now, given that the economy is near full employment, inflation remains above the Fed's 2% goal, and tariffs are exerting upward price pressures. Kugler's term runs out in January; her replacement is certain to echo Trump's call for rate cuts.
Write to Randall W. Forsyth at [e-mail]