Trump wants lower long-term yields. A Warsh Fed cannot deliver them
Trump is pushing to bring down long-term borrowing costs, but the Fed mostly controls short-term rates. That leaves millions of mortgage borrowers unlikely to see quick relief.
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By Torontoer Staff
President Donald Trump has shifted his focus from urging the Federal Reserve to cut its policy rate to trying to bring down long-term borrowing costs, a move aimed at easing mortgage pain for voters. Nominee for Fed chair Kevin Warsh is unlikely to be able to deliver the outcome the White House wants, leaving millions of borrowers facing persistently high mortgage rates.
The White House has been explicit about its target. Treasury Secretary Scott Bessent has talked about wanting a 10-year Treasury yield with a 3 per cent "handle," a level only briefly seen during Trump's second term. But the Fed has limited control over that benchmark, and investors are signalling they do not expect long-term yields to fall in step with any short-term rate cuts.
Why the Fed cannot directly control long-term yields
The Federal Reserve directly manages the short-term federal funds rate. That rate influences borrowing costs across the economy, but mortgage and other long-term rates are primarily set by the market for Treasury bonds, especially the 10-year yield. The Fed can affect that market indirectly, but it cannot force long-term yields to move to a specific level.
Last year the Fed cut its policy rate by 75 basis points, yet the 10-year Treasury yield rose and currently sits around 4.30 per cent. That has steepened the yield curve, widening the spread between short and long rates. In normal times a steeper curve reflects growth expectations, but in today’s environment it also points to higher inflation expectations and a rising term premium, the extra return investors demand for holding long-dated bonds.
What investors are pricing in
Markets expect a Warsh-led Fed to cut the funds rate by roughly 50 basis points this year, according to interest rate futures. Yet futures do not suggest that long-term yields will fall by the same amount. That gap reflects investor concern that early policy easing could fuel higher inflation later, which would push long-term rates up rather than down.
"We want a 10-year yield with a 3-per-cent 'handle',"
Treasury Secretary Scott Bessent
The term premium on 10-year Treasuries is near its highest level in more than a decade. Rising consumer inflation expectations, uncertainty about fiscal finances, and concerns over central bank independence are key contributors. Those forces make it harder to bring long-term borrowing costs down by simply cutting the policy rate.
The AI argument and the housing market
Warsh and some in the administration point to an artificial intelligence-driven productivity boom as the path to lower inflation expectations and, ultimately, lower long-term yields. If productivity improves substantially, it could reduce inflationary pressures and allow borrowing costs to fall without stoking price growth.
"An AI-driven productivity boom is the key to lowering inflation expectations and long-term borrowing costs,"
Kevin Warsh, Fed chair nominee
That scenario would help the housing market. Thirty-year mortgage rates have not fallen below 6 per cent since the summer of 2022. Lower mortgage rates would ease the affordability squeeze for homebuyers, boost the housing sector and increase household wealth through higher home values.
Relying on an AI miracle is risky. The scale and timing of any productivity gains from AI remain uncertain, and they may not be sufficient to offset other upward pressures on inflation and long-term yields, such as fiscal deficits and stronger nominal growth.
Why long-term yields may stay elevated
Washington’s fiscal position continues to weigh on bond markets. Financial conditions are among the loosest in four years, and headline growth indicators have been solid. Together, those factors suggest nominal growth and the compensation demanded by long-term bondholders will remain elevated, limiting scope for a big drop in long-dated yields.
A rapid deterioration in economic data, a sharp labour market slowdown, or an external shock could change the outlook, but such outcomes would be a policy reversal rather than the result of deliberate Fed action aimed at trimming long-term borrowing costs.
What this means for borrowers and politics
- Mortgage rates are likely to remain elevated unless there is a significant change in inflation expectations or a major macro shock.
- Short-term Fed cuts would ease some borrowing costs but may not translate into meaningful relief for long-term loans like 30-year mortgages.
- Political pressure, including proposals to buy mortgage-backed securities or cap credit card rates, may provide limited practical relief.
With midterm elections approaching, the administration is pressing for visible fixes to affordability. The tools at the government’s disposal can provide targeted relief, but they cannot substitute for the market forces that set long-term yields. That constraint will leave many borrowers confronting high mortgage costs for the foreseeable future.
For borrowers, the key takeaway is that a faster decline in mortgage rates depends less on who sits in the Fed chair and more on how inflation expectations, fiscal policy and market risk appetite evolve. Policymakers can influence those factors, but none can guarantee the sort of rapid fall in long-term yields the White House says it wants.
Federal ReservemortgagesTreasuryUS politicseconomy
