Struggle to Lower Interest Burden

Battle Being Pursued On Various Fronts

Markets are breathing a sigh of relief as an uneasy truce has taken hold between Israel and Iran. The apparent calm follows a targeted U.S. bombardment of suspected Iranian nuclear sites. For now, direct military confrontation appears paused. But if the past is prologue, this ceasefire could turn out to be more tactical than permanent. Underlying strategic tensions between Israel and Iran — around nuclear enrichment and regional influence — remain unresolved.

While the Middle East may have stepped back from the brink, Washington’s two other major battlegrounds are still wide open with implications for the fiscal deficit and the cost of servicing the ballooning debt. The debt now stands at $36 trillion, equivalent to over 120% of gross domestic product.

First, the tariff war: President Donald Trump’s repeated threats of unilateral tariffs — with little regard for multilateral negotiation or WTO rules — continue to hang over global trade which is going through an uneasy pause approaching a Trump-imposed July 9 deadline. Whatever is the level of tariffs that ultimately comes into being, the levies are unlikely to increase fiscal revenues to fully offset the resulting supply bottlenecks that could throttle world trade with adverse implications for tax collections.

To date, markets have discounted much of the tariff rhetoric. S&P 500 index hit a record high yesterday. The complacency is dangerous. The US dollar has weakened by more than 8% year-to-date measured by the DXY index partly due to trade tensions, and is currently trading at the lowest level since March 2022. $1.04 purchased a euro at the start of 2025. Today, you require more than $1.17. The weaker dollar will increase import and input costs and put upward pressure on inflation and bond yields.

The second front — fiscal management — remains similarly fraught. Trump’s promise of a “Big Beautiful Bill” — which initially conjured bipartisan dreams of a transformative infrastructure and tax reform package — has devolved into a game of fiscal brinkmanship. The administration insists the bill will be “fiscally responsible,” but there is no consensus on how to achieve that. Deficit hawks demand offsetting spending cuts, while Trump loyalists want immediate spending to juice up growth ahead of the November 2026 mid-term elections. Meanwhile, the Treasury market watches nervously as the 10-year yield oscillates, pricing in more political dysfunction than economic clarity.

It is with these factors in the background that one should view two other related issues — President Donald Trump's continuing verbal attacks on Federal Reserve Chairman Jerome Powell for not lowering interest rates, and the announcement on Wednesday that the Supplementary Leverage Ratio (SLR) will be reduced. If the Federal Open Market Committee were to lower its policy rate, the President hopes, that would bring down the yield on 10-year and 30-year obligations, lowering the Treasury’s debt service burden. And lowering the SLR would increase the ability of large banks to buy Treasurys in case of a funding crisis and — you got it! — thereby lower the yield on the securities.

But in demanding that the Fed lower the Federal Funds rate by at least two percentage points immediately, President Trump would do well to be sensitive to recent monetary history. The most pronounced surge in 10-year Treasury yields occurred during the final four months of 2024 — precisely when the Fed was in the middle of a dovish pivot. Between September and December, the central bank lowered its policy rate by a full percentage point with the yield on 10-year Treasurys rising by almost one percentage point.

The sharpest ascent in yields began immediately after the Fed surprised markets by cutting rates by 50 basis points on September 18, instead of the widely expected 25 basis points. That move, intended to stimulate, instead signaled panic — and triggered a market reassessment of inflation and deficit risks. If history repeats itself — or even merely rhymes — the outcome of a renewed Federal Funds rate-cutting campaign may be to increase, not decrease, the Treasury’s debt service burden.

If verbal attacks alone may not succeed in the task of having the central bank lower its policy rate, there was rumor last week that the President may nominate a "Shadow Chair" well before Powell’s term expires next May. The nominee would, under current thinking, comment publicly after each FOMC meeting. The model appears to echo a proposal floated last October by Scott Bessent, now Treasury Secretary, in an interview with Barron’s. The strategy is clear: by planting a credible heir apparent into the public conversation, the President hopes markets will shift their focus from Powell’s cautious tone to the more accommodative message from the designated successor, thus building pressure on the current FOMC to adopt the President’s preferred policies.

The plan comes with its own risk. If the Shadow Chair echoes Trump’s views too closely, he or she may be dismissed by investors as a political toady, losing credibility with both FOMC members and financial markets. Just as likely, the nominee might tilt toward the prevailing FOMC consensus once confronted with internal data and institutional norms — only to be discarded by the President before the nomination even reaches the Senate floor. Either outcome would deepen uncertainty, further politicize monetary policy, and risk undermining the very market confidence that lower rates are intended to restore.

So while one geopolitical flashpoint has cooled — for now — the battle for fiscal credibility remains unresolved.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

www.srikumarglobal.com

@SriKGlobal

June 28, 2025

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

This publication is for information purposes only. Past performance is no guarantee of future results. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice. Sri-Kumar Global Strategies, Inc. assumes no duty to update any such statements. Any holdings of a particular company or security discussed herein are under periodic review by the author and are subject to change at any time, without notice. This report may include estimates, projections and other "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. This publication is not to be used or considered as an offer to sell, or a solicitation to an offer to buy, any security. Nothing contained herein should be considered a recommendation or advice to purchase or sell any security. Sri-Kumar Global Strategies, Inc., or its employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time without notice. ©Copyright 2025 -- Sri-Kumar Global Strategies, Inc., 312 Arizona Avenue, Santa Monica, CA 90401; Telephone +1-310-455-6071