Not Much Stagflation Today

Earlier this year, US Treasury Secretary Scott Bessent said that he and President Donald Trump were focusing on the 10-year Treasury bond yield as a key metric for economic health, rather than the Fed's short-term interest rate. He stated, "He and I are focused on the 10-year Treasury," indicating a strategy to manage borrowing costs through fiscal policy rather than pressuring the Fed to cut rates. That didn't last long. Within a few weeks, Trump started badgering Powell to lower the federal funds rate.

Today, Fed Chair Jerome Powell poked a stick at the White House. He suggested that bond yields might stay elevated as a result of more frequent "supply shocks," like tariffs. "Higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s," Powell said in prepared remarks for the Thomas Laubach Research Conference in Washington, D.C. "We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks."